Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) represents the direct costs incurred in producing goods or services sold by a business. It includes materials, labor, and other direct expenses but excludes indirect costs like rent or marketing.

What’s Included:

  • Raw materials

  • Direct labor

  • Production utilities

  • Manufacturing overhead tied to output

Formula:

COGS = Opening Inventory + Purchases – Closing Inventory

Importance:

  • Directly affects gross profit.

  • Provides insight into production efficiency and profitability.

  • Aids pricing and budgeting decisions.

Example:

A clothing retailer in the UAE starts January with AED 100,000 in stock, purchases AED 50,000 worth of fabric, and ends the month with AED 30,000 in inventory. Its COGS for January is AED 120,000.