Cost of Goods Sold (COGS)

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Cost of goods sold (COGS) is the direct cost of producing the goods a company sells. It includes the cost of materials, labor, and overhead. COGS is an important metric for understanding a company's profitability. A company's gross profit margin is calculated by subtracting COGS from revenue.

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There are two main types of COGS: variable and fixed. Variable costs are costs that vary directly with the volume of production. For example, the cost of materials and labor would be variable costs for a manufacturing company. Fixed costs are costs that do not vary with the volume of production. For example, rent and depreciation would be fixed costs for a manufacturing company.

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Companies track COGS in order to understand their profitability and make informed decisions about pricing and production. COGS can be calculated using a variety of methods, but the most common method is to use the following formula:

COGS = Beginning inventory + Purchases - Ending inventory

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Beginning inventory is the value of the goods a company has on hand at the start of a period. Purchases are the cost of goods a company buys during a period. Ending inventory is the value of the goods a company has on hand at the end of a period.

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COGS is an important metric for investors because it can help them understand a company's profitability. A company with a high COGS may be less profitable than a company with a low COGS. Investors should also be aware of the different types of COGS and how they are calculated.