The abbreviation for the direct costs of producing goods sold by a company is COGS, meaning cost of goods sold.
COGS measures the carrying value of inventory that a business sold during a reporting period. For a manufacturer, it can include raw materials, production labor, and allocated factory overhead. For a retailer, it generally begins with the purchase cost of merchandise, plus acquisition costs such as freight and duties.
COGS is recorded as an expense when the related goods are sold, not necessarily when they are purchased or manufactured. Unsold goods remain inventory on the balance sheet. This timing is why inventory accounting affects both reported profit and the period in which profit appears.
A common mix-up is confusing COGS with operating expenses. Rent for a corporate office, advertising, and many administrative salaries are usually operating expenses rather than COGS. COGS is used to calculate gross profit: revenue minus COGS. Businesses may use inventory-costing methods such as FIFO, LIFO where permitted, specific identification, or weighted average.