What does 'cost of goods sold' (COGS) represent?

Cost of Goods Sold (COGS) represents the direct costs attributable to the production of goods sold by a company. This includes expenses such as raw materials, labor directly involved in manufacturing, and other costs directly associated with the production process. COGS is a crucial metric because it is used to determine the gross profit of a business by subtracting COGS from total revenue. Understanding COGS allows businesses to analyze their production efficiency and pricing strategies.

The other options focus on different aspects of business expenses. Total overhead costs encompass indirect expenses that are not directly tied to production, while total expenses include all costs a business incurs, not just those that relate to goods sold. Selling and administrative expenses refer specifically to costs associated with selling products and managing the business, which are separate from the costs of producing the goods themselves. Thus, the focus on direct production costs provides the clear and precise definition that aligns with the meaning of COGS.