What does the term 'cost of goods sold' relate to in the concept of gross margin?

The term 'cost of goods sold' (COGS) refers specifically to the direct costs that are incurred in the production of goods that a company sells during a certain period. This includes the expenses related to materials, labor, and overhead involved in producing the goods that are sold to customers.

Gross margin is calculated by taking total sales and subtracting the cost of goods sold. It represents the amount of revenue that exceeds the direct costs associated with the production of those goods, providing insight into how efficiently a company uses its resources to produce and sell products. A higher gross margin indicates that a company retains more profit from each dollar of sales after covering production costs.

The other options relate to aspects of business finances but do not accurately define the relationship between COGS and gross margin. Overall, understanding COGS is crucial for analyzing a company’s profitability and operational efficiency.