What does Cost of Goods Sold (COGS) represent?

Cost of Goods Sold (COGS) represents the total cost of merchandise sold during the period. This figure is crucial for businesses as it directly impacts the gross profit, which is calculated by subtracting COGS from total sales revenue. By accurately measuring COGS, companies can assess their production efficiency and pricing strategies, ultimately providing insights into profitability.

COGS includes all costs directly tied to the production of goods that are sold, such as materials, labor, and overhead expenses. Understanding COGS allows businesses to manage their inventory costs and analyze their operational performance over specific time frames.

In contrast, operating expenses cover a broader category that includes costs required to run the business that aren’t directly tied to product creation, such as administrative salaries or marketing costs. Income generated through sales refers to total revenue from selling goods or services, not a measure of costs. The total value of inventory at the end of the period pertains to assets on hand rather than costs incurred from sales activities.