Cost of goods sold (COGS)

Imagine you're running a lemonade stand, and every lemon and spoonful of sugar you use is costing you money. Cost of Goods Sold (COGS) is essentially the bill for making all those lemonades. It's the thing that makes sure you remember that "free lemons" from mom's kitchen are actually draining your lemonade empire's piggy bank.

Cost of Goods Sold (COGS) refers to the direct costs attributable to the production of the goods sold by a company. This figure encompasses all expenses related to the manufacturing process, including the costs of materials, labor, and overhead tied directly to the creation of the product. COGS is a critical component in assessing a company’s financial performance as it is subtracted from revenues to determine gross profit. Managing and analyzing COGS allows businesses to evaluate pricing efficiency, control overhead costs, and streamline production to enhance profitability. It's essential for accurate financial reporting and plays a vital role in strategic decision-making and pricing strategies.