What does the Cost of Goods Sold (COGS) include?

The correct answer is focused on the components that make up the Cost of Goods Sold (COGS), which is a critical measure in accounting for the profitability of a business. COGS includes all direct costs associated with the production of goods sold by a company. Specifically, this encompasses raw materials needed for manufacturing the products, direct labor costs associated with workers who are directly involved in the production process, and factory overhead, which includes indirect costs that are necessary for production but cannot be directly tied to specific units of goods, such as utilities and maintenance costs related to manufacturing equipment.

This understanding of COGS is vital for financial reporting and analysis, as it directly affects the gross profit calculation and ultimately the net income. By accurately accounting for these expenses, a business can ensure better financial management and pricing strategies. The focus is on direct costs relevant to production, rather than operational or selling expenses, which are not included in COGS.