Second, the COGS calculation is used in the determination of tax liability. Gross profit is a significant metric for assessing the financial health of a company. First, it is used to determine the gross profit amount of a company, which is the difference between the revenue generated from the sale of goods and the cost of producing those goods. The calculation of COGS is essential for two main reasons. COGS does not include indirect expenses, such as marketing or administrative costs. In terms of accounting, Cost of Goods Sold (COGS) refers to the direct costs associated with the production of the goods sold by a company.Īs per this definition of cost of goods sold, it includes the cost of the materials used in production, the cost of the labour used to produce the goods, and the cost of any other direct expenses item which is associated with the production of the goods. We've written this post to help small and medium-sized business owners (SMEs) understand what this phrase means. Some of you may be wondering what we mean when we talk about "Cost of Goods Sold" and how it helps your company. Because a high Cost of Goods sold can cut into a company's profitability, it's critical to monitor this figure and understand what it means for your organisation. And further facilitates the decision-making process when it comes to pricing, inventory, and expenditures. Knowing your COGS gives you a clear picture of your company's costs. Carefully monitoring your Cost of Goods sold (COGS) is one approach to achieve this. As a business owner, you are constantly looking for methods to cut costs and increase profits.
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