"Cost of Goods Sold" (COGS) - Business

The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on an income statement and can be deducted from revenue to calculate a company's gross margin.

(Gross Revenue - COGS) = Gross Margin

COGS is the costs that go into creating the products that a company sells; therefore, the only costs included in the measure are those that are directly tied to the production of the products. For example, the COGS for an automaker would include the material costs for the parts that go into making the car along with the labor costs used to put the car together. The cost of sending the cars to dealerships and the cost of the labor used to sell the car would be excluded.

While, the exact costs included in the COGS calculation will differ from one type of business to another, the cost of goods attributed to a company's products are expensed as the company sells these goods. This valuation can be calculated via a variety of different means including FIFO, LIFO, and Average Cost.

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