What does the cost of goods sold include?

The cost of goods sold (COGS) is a crucial financial metric that directly relates to the costs incurred during the production of goods that a business sells. This includes the cost of raw materials, which are the basic building blocks necessary to create a product, as well as other production factors such as labor directly involved in manufacturing the products and any direct overhead costs associated with the production process.

In contrast, other choices mention components that do not fit within the COGS category. Operating expenses and salaries are typically classified separately under operational costs, as they cover ongoing expenses related to running the business—not directly linked to the production of specific goods. Shipping costs and advertising expenses are also considered operating expenses and are typically accounted for in different financial categories and not included in COGS. Lastly, taxes related to sales are recorded as a liability and do not factor into the direct costs associated with producing goods. Therefore, the correct identification of COGS as primarily encompassing raw materials and production factors is critical for understanding a company's gross profit and overall financial health.