What is typically included in COGS?

Cost of Goods Sold (COGS) encompasses the direct costs attributable to the production of the goods sold by a company. This typically includes direct materials and overhead costs that go into producing a product.

Direct materials are the raw materials that are fundamentally required to manufacture a product. Overhead costs include any indirect costs necessary for production, such as utilities, rent for the manufacturing facility, and factory labor that is not directly tied to production but is essential for creating the product.

While marketing and advertising expenses, administrative salaries, and supplier discounts may influence a company's overall financial picture, they do not directly impact the cost of producing the goods sold. Advertising expenses and administrative salaries are considered operating costs rather than costs of goods sold, while supplier discounts might affect the overall purchasing strategy but are not directly accounted for in COGS calculations. Therefore, the understanding of COGS focuses on direct production costs, making the inclusion of direct materials and overhead costs critical to accurately determining a company's gross margin.