How is the cost of goods sold (COGS) defined?

The cost of goods sold (COGS) is primarily defined as the direct costs attributable to goods that a company sells during a specific period. This includes costs directly tied to the production of the goods, such as raw materials, labor directly involved in production, and any other costs that can be directly traced to the product. This definition is essential for understanding how much it truly costs a company to produce the goods that generate revenue.

Understanding COGS is critical for accurately calculating gross profit, which is revenue minus COGS. By focusing on the direct costs related to production, companies can assess their operational efficiency and profitability more effectively. This direct relationship helps businesses manage their pricing strategies and inventory control, impacting overall financial health.

The other answer choices do not accurately describe COGS. The total expenses incurred by a business typically include fixed and operating costs that are not limited to the direct costs of production. Selling and distribution costs relate to the broader expenses necessary to market and deliver the product but are separate from COGS. Indirect costs associated with production are often classified as overhead, which, while important, do not fall directly under COGS when calculating gross margin.