Understanding COGS: Direct Costs and Gross Profit

COGS stands for Cost of Goods Sold. It is a term used in accounting to describe the direct costs associated with producing and selling a product or service. These costs can include materials, labor, and overhead expenses that are directly attributable to the production and sale of the product or service.

For example, if you own a bakery and sell bread, the flour, sugar, and other ingredients you use to make the bread would be considered COGS. Additionally, the wages you pay to your bakers and other employees who work directly on producing the bread would also be included in COGS. Overhead expenses such as rent, utilities, and insurance that are directly related to the bakery would also be included in COGS.

COGS is an important metric for businesses because it helps them understand the profitability of their products or services. By subtracting COGS from revenue, businesses can calculate their gross profit, which represents the profit made on each sale before considering other expenses such as overhead and marketing costs.