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What are cost of goods sold?

Cost of goods sold represents the total amount of expenses that is incurred to produce the product or service that the company sells to its customers. There is a level of subjectivity involved when determining whether a cost is a cost of good sold or an operating expense.

Cost of goods sold generally includes direct materials, direct labors, and manufacturing overhead (factory costs, indirect labor, etc.). Cost of good sold is also commonly referred to as manufacturing costs.

Under U.S. GAAP, cost to produce the good or service are capitalized into inventory on the balance sheet until the product is sold. When the product is sold and revenue is recognized, the costs to produce the good or service are recognized on the income statement in cost of goods sold. As you can see below, cost of goods sold are subtracted from revenue to calculate gross profit.

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