What type of costs are included in the term 'cost of goods sold'?

The term 'cost of goods sold' (COGS) specifically refers to the direct costs attributable to the production of the goods that a company sells. This includes expenses such as raw materials, labor directly involved in manufacturing the product, and any overhead costs that are directly tied to production.

Understanding COGS is crucial because it directly affects a company's profitability. When sales revenue is generated, COGS is deducted from it to determine the gross profit. Therefore, a comprehensive grasp of what constitutes COGS enables businesses to make informed decisions on pricing, budgeting, and financial forecasting.

In contrast to production costs, marketing expenses, financing charges, and administrative salaries do not fall under COGS because they are not directly linked to the production of goods. Marketing expenses relate to advertising and promoting products, financing charges pertain to interest on borrowed funds, and administrative salaries are related to the overall management and operation of the business rather than the production of specific goods.