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Definition and Examples of

Cost of Goods Sold (COGS)

Expanded Explanation: COGS is a critical component in calculating gross profit, which is then used to determine net profit. It includes direct costs like raw materials, labor involved in production, and overhead costs directly tied to the production process.

Potential Issues: Misstating COGS can lead to inaccurate gross margin calculations, misleading the business about its true profitability.

Example: For your handmade soap business, COGS includes the cost of ingredients and packaging for each bar of soap sold.

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