What does "cost of goods sold" (COGS) refer to?

"Cost of goods sold" (COGS) specifically refers to the direct costs that are incurred in the production of the goods that a company sells. This includes expenses such as materials and labor that go directly into the creation of products. Understanding COGS is essential for businesses as it directly affects gross profit, which is calculated as total sales revenue minus COGS. By accurately tracking COGS, a business can better assess its profitability and make informed decisions regarding pricing and inventory management.

The concept of COGS is crucial in determining a company's financial health, as it ties directly to efficiency in production and inventory control. In contrast, other options presented—like total revenue, operating expenses, and administrative costs—pertain to different financial metrics and do not reflect the direct costs associated with the production of sold goods. Understanding these distinctions helps clarify the role of COGS in overall financial analysis and reporting.