Cost of Goods Sold (COGS) is an accounting term that refers to the direct costs involved in producing the goods that a company sells during a specific period. These costs typically include the cost of materials and labor directly used in the production process but exclude indirect expenses like distribution and sales costs.

For instance, for a furniture business that produces wooden tables, COGS would encompass the cost of wood, nails, and paint, as well as the wages of the workers assembling the tables. However, it would not include costs such as marketing expenses for selling the tables or transportation fees to deliver them to customers.

One of the main purposes of calculating COGS is to determine a company's gross profit: Gross Profit = Revenue - COGS. Understanding and optimizing COGS is essential for businesses to maintain healthy profitability and competitive pricing. This term is widely used in financial accounting and reporting.