Cost of goods sold (Definition)
Cost of goods sold (COGS) is also known as cost of sales. It refers to the total cost involved in manufacturing a business’ product, or the total cost of a product that is purchased, then sold. This includes all costs and expenses that directly relate to producing goods such as items for resale, raw materials, parts used to make the product, labour costs, supplies to make or sell a product, overhead costs (utilities), and shipping or freight. Indirect costs not included are rent, marketing or advertising. Understanding COGS is essential as it shows how much profit the business is making per item and where costs can be improved. To determine your gross profit margin, subtract your COGS from the sale price. For example: if you make a cup of coffee for $2 (COGS) and sell it for $5, your gross profit margin is $3.
