Cost of Goods Sold (COGS) refers to the direct costs incurred by a company in producing or acquiring the goods or services it sells. It includes all the expenses directly associated with the production or purchase of the products or services that are sold to customers.

COGS typically includes the following components:

1. Direct Materials: The cost of raw materials or components used in the production process. This includes the actual cost of purchasing or producing the materials, as well as any freight or shipping charges associated with acquiring them.
2. Direct Labor: The cost of the labor directly involved in the production process. This includes wages, salaries, benefits, and any other costs associated with the employees directly involved in manufacturing or producing the goods or services.
3. Manufacturing Overhead: This includes indirect costs that are not directly attributable to a specific product but are still incurred in the manufacturing process. Examples of manufacturing overhead costs include factory rent, utilities, equipment depreciation, and maintenance expenses.
4. Other Direct Costs: This category includes other direct costs specific to the production process, such as packaging materials, subcontractor costs, or any other costs directly associated with producing the goods or services.

By subtracting the COGS from the total revenue generated by selling the products or services, a company can calculate its gross profit. COGS is an essential component of the profit and loss statement, providing insights into the direct costs of delivering the goods or services and helping determine the profitability of a company’s core operations.

It’s important to note that COGS is relevant to businesses that engage in the production or sale of physical goods. For service-based businesses, the concept of COGS may be replaced by the direct costs associated with providing the services, such as labor and materials specific to service delivery.