What is the definition of "cost of goods sold"?

The term "cost of goods sold" (COGS) refers specifically to the direct costs attributable to the production of the goods that a company sells during a specific period. This includes not only the cost of purchasing stock or inventory but also encompasses costs directly tied to the manufacturing of any products, such as raw materials and labor that goes into production.

Understanding this definition is crucial for financial analysis, as COGS is subtracted from total revenue to determine a company's gross profit. It's a key metric for businesses involved in the manufacturing or retail of physical products, as it helps measure the efficiency of production and inventory management. The calculation of COGS is essential for pricing strategies and for assessing overall profitability without the influence of indirect expenses like operating costs or labor unrelated to production.