Cost of Goods Sold (COGS) is an important consideration in an established business or prospective business that essentially helps firms to set the price of a product or any service. COGS includes the direct expenses incurred by a firm in producing a product or service. It includes all direct labor and material costs incurred during the production of goods or services.
Cost of Goods Sold is an expense that is reported on the income statement of a firm. It does not include variable expenses such as marketing, distribution, administration costs. It is basically raw material and direct labor expenses incurred in manufacturing a product. As revenue increases, COGS will increase proportionately as costs incurred in production also increases.
Firms continue purchasing inventories to support production, and purchased inventory is added to beginning inventory. And ending inventory is subtracted to arrive at COGS. The profit-making ability of the business is largely dependent on the cost of goods sold by the business. COGS is essentially the cost of doing business and helps analysts and fund managers to judge the profitability of the business.