Many companies miscalculate their profitability by not understanding how to classify and properly allocate both: the direct and indirect costs of their businesses.

To assess what is your organization’s gross profit and ensure that your products’ price is making a profit, it is necessary to understand what the Cost of Goods Sold means and how to calculate it. 

The cost of goods sold (COGS) represents the sum of all direct costs incurred to produce any product or service. It is a tax reporting requirement and part of one crucial financial reporting to any company: the Income Statement, also known as the Profit and Loss Statement.

Cost of goods sold (COGS) refers to the direct costs of producing the goods produced and sold by a company. This amount includes the material cost, direct labour cost, manufacturing overhead cost, and all the other costs incurred in the operations. It excludes indirect expenses referred to as selling, general and administrative (SG&A) expenses.