Cost of Goods Sold (COGS) refers to the direct costs associated with producing the goods a company sells. This includes expenses like materials, labor, and manufacturing overhead. COGS is crucial for determining a company's gross profit, as it is subtracted from total sales revenue. Calculating COGS helps businesses understand their profitability and manage inventory effectively. It is reported on the income statement and can vary based on production methods and sales volume. Accurate tracking of COGS is essential for financial analysis and tax reporting, impacting overall business performance.