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What Is Cost of Goods Sold?

Commerce Glossary > Cost of Goods Sold (COGS)

Cost of Goods Sold Definition | TLDR

Cost of Goods Sold (COGS) refers to the direct costs incurred by a company in producing or acquiring the goods or services sold during a specific period, including expenses such as materials, labor, and overhead costs.

Cost of Goods Sold (COGS) Meaning

Cost of Goods Sold (COGS) is a fundamental accounting metric that represents the direct costs associated with producing goods or services that a company sells to generate revenue. COGS includes expenses directly related to the production process, such as raw materials, labor costs directly involved in manufacturing, and overhead costs directly attributable to production activities. Essentially, COGS reflects the amount of money a company spends to produce the goods or services sold during a specific period.

How does accurately calculating the Cost of Goods Sold (COGS) impact the financial performance and decision-making process of e-commerce businesses?

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Cost of Goods Sold (COGS) is a fundamental accounting metric that represents the direct costs associated with producing goods or services that a company sells to generate revenue. COGS includes expenses directly related to the production process, such as raw materials, labor costs directly involved in manufacturing, and overhead costs directly attributable to production activities. Essentially, COGS reflects the amount of money a company spends to produce the goods or services sold during a specific period.

COGS is a key component of the income statement, where it is typically reported alongside other operating expenses. It is crucial for investors, creditors, and stakeholders to understand COGS when evaluating a company's financial performance and operational efficiency. A high COGS relative to revenue may indicate inefficiencies in production processes or increased costs of raw materials, while a declining COGS may suggest improved cost management or economies of scale. Overall, COGS serves as a critical measure for assessing the cost-effectiveness and profitability of a company's core business activities.

FAQs

Yes, COGS includes expenses directly related to the production or acquisition of goods, such as raw materials, labor costs, and manufacturing overhead.

Yes, COGS is subtracted from a company's total revenue to determine its gross profit. Gross profit represents the amount of revenue left after deducting the direct costs associated with producing goods, providing insight into the efficiency of a company's core operations.

No, COGS only accounts for direct expenses incurred in the production or acquisition of goods. Indirect expenses, such as administrative costs, marketing expenses, and overhead, are typically accounted for separately on the income statement and are not included in the calculation of COGS.

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