What does 'cost of goods sold (COGS)' refer to?

Cost of Goods Sold (COGS) refers specifically to the direct costs attributable to the production of the goods that a company sells during a given period. This includes the cost of raw materials and labor directly used to create the product that is being sold.

Understanding COGS is essential for calculating gross profit, which is determined by subtracting COGS from total revenue. By clearly identifying these direct costs, businesses can better assess their profitability and make more informed pricing and inventory decisions. COGS reflects the expenses directly linked to production and, therefore, only encompasses costs that are incurred when goods are manufactured and sold.

While the other options touch on various costs associated with running a business, they do not capture the essence of what constitutes COGS. Indirect costs and selling or administrative expenses fall outside the scope of direct production costs that are calculated for COGS.