Question 1

What is cost of goods sold (COGS)?

Accepted Answer

COGS is the direct cost of producing the goods or services your business sells. It includes raw materials, direct labor, and manufacturing overhead. It does not include indirect expenses like rent, marketing, or administrative salaries.

Question 2

How do you calculate COGS?

Accepted Answer

COGS = Beginning Inventory + Purchases During the Period - Ending Inventory. For service businesses, COGS includes the direct labor and materials tied to delivering the service.

Question 3

Why does COGS matter for my business?

Accepted Answer

COGS directly determines your gross profit margin. If COGS is too high relative to revenue, you will struggle to cover operating expenses. Tracking COGS helps you set prices, identify waste, and negotiate better with suppliers.

Question 4

What is the difference between COGS and operating expenses?

Accepted Answer

COGS covers direct production costs: materials, direct labor, and manufacturing overhead. Operating expenses cover everything else: rent, utilities, marketing, administrative salaries, and software. Both reduce profit, but they appear on different lines of the income statement.

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