Cost of goods sold (COGS) is the total of the costs directly attributable to producing goods and includes material and labor costs. It does not include indirect costs such as sales, marketing and distribution.
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In accounting, COGS is a standard item in the expense section of a company's income statement, which may also be called a profit and loss statement (P&L). Costs can only be expensed and shown in the P&L after the goods have been sold and their revenues reported in the P&L.
COGS can also appear in the accounting records used for inventory management. If the company is using a perpetual inventory system (which records the sale or purchase of inventory in near real time), COGS will be an account in the chart of accounts (COA) that is tracked in the general ledger (GL), and its total will be carried over to the P&L. However, the GL won't have a COGS account in its COA if the periodic inventory method (which only keeps track of inventory at the beginning of a period) is being used, though it's possible the figure will be labeled COGS when it is carried over to the P&L.
COGS is also a variable in calculations of certain metrics that are used to track operational and supply chain efficiency, such as inventory turns.
COGS is sometimes referred to as cost of merchandise sold or cost of sales. Some companies that sell a mix of products and services prefer a broader term, cost of revenue, of which COGS is one component.