Cost of Goods Sold A subtotal of the accounts of the ‘direct costs’ of the purchase and production of the goods that were sold.

Source: click here.

The cost of goods sold represents the direct costs associated with producing or purchasing the goods sold or services provided. This includes materials, labour, and other directly attributable expenses such as factory overheads. The COGS is subtracted from net sales to determine gross profit and is a crucial indicator of a company’s production efficiency and profitability.

Example: A bakery produces pastries that retail for £20,000.The cost of ingredients (flour, sugar, eggs, etc.) amounts to £10,000, and wages for bakers add another £2,000. Utility costs for operating ovens and equipment are £500. The total cost of goods sold is £12,500. Thus, the bakery’sgross profit is £7,500 (£20,000 - £12,500). This COGS figure allows the bakery to assess its production efficiency and identify areas where costs can be reduced to increase profitability.

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