What is typically included in the calculation of Cost of Goods Sold (COGS)?

The calculation of Cost of Goods Sold (COGS) encompasses all the costs directly related to the production of goods that a company sells. This includes direct materials, which are the raw materials used to create a product, and direct labor, which refers to the wages paid to workers who are directly involved in the manufacturing process. Additionally, overhead costs are included; these are indirect costs associated with production, such as utilities and rent for the manufacturing facility.

Including all three elements—direct materials, direct labor, and overhead—is essential in providing an accurate representation of the expenses incurred in producing goods. This thorough approach helps businesses assess their profitability and control production costs.

Other options do not fit the criteria for COGS. Marketing and distribution expenses relate to an entirely different aspect of the business, focusing on selling rather than production. Research and development costs are expenses tied to innovation and improving products, rather than the cost of producing goods that are currently being sold. Thus, only the combination of direct materials, direct labor, and overhead truly constitutes COGS.