The cost of goods sold (COGS) is the sum of all direct costs associated with making a product. It appears on an income statement and typically includes money mainly spent on raw materials and labour. It does not include costs associated with marketing, sales or distribution.
For example, a furniture manufacturer's COGS for the year totals $620,000 — made up of $350,000 in lumber and materials, $180,000 in direct labour wages, and $90,000 in manufacturing overhead — while $1,100,000 in revenue generates a gross profit of $480,000.
Why it matters: It is the largest expense for product-based businesses; minimizing COGS directly and powerfully boosts gross margins and profitability.
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