What does COGS stand for in a financial context?

In a financial context, COGS stands for Cost of Goods Sold. This term refers to the direct costs attributable to the production of the goods that a company sells. It includes expenses such as materials and labor directly used in creating the product, but it does not include indirect costs like distribution, sales force costs, or other overhead. Understanding COGS is crucial for calculating gross profit, as it is subtracted from total revenue to determine how much money a company is retaining from its sales after covering the costs of producing its products. This metric is essential for understanding a business's financial performance and operational efficiency.