COGS, or cost of goods sold, is a term used in accounting to refer to the direct costs associated with producing the goods or services that a business sells. COGS includes the direct labor, materials, and overhead costs that are directly tied to the production of a company's goods or services. It does not include indirect costs, such as administrative or selling expenses, which are not directly tied to production. COGS is an important concept in accounting because it is used to calculate a company's gross profit. Gross profit is the difference between a company's revenue and its COGS. By subtracting COGS from revenue, a company can determine how much it earned from its sales after accounting for the direct costs of production. This information can be useful for evaluating a company's financial performance and making decisions about its operations. For example, if a company has revenue of $100,000 and COGS of $60,000, its gross profit would be $40,000 ($100,000 - $60,000). This means that the company earned $40,000 in profit from its sales after accounting for the direct costs of production. By analyzing its gross profit, the company can determine whether it is generating enough profit from its sales and identify opportunities to improve its financial performance.
