DECA Retail Merchandising Practice Exam

What does the term 'Cost of Goods Sold' (COGS) refer to?

1. The total sales minus returns

2. Expenses incurred in producing the goods sold by a company

3. The gross profit made on a product

4. Operating costs of the business

The correct answer is: Expenses incurred in producing the goods sold by a company

The term 'Cost of Goods Sold' (COGS) refers to the direct expenses incurred in producing the goods that a company sells. This includes costs such as raw materials, labor directly involved in production, and any manufacturing overhead that can be directly traced to the production of those goods. Understanding COGS is essential for businesses to determine their gross profit, as it helps in calculating the total cost associated with producing goods that have been sold during a specific period. By accurately measuring COGS, businesses can effectively assess their profitability and make informed decisions about pricing, budgeting, and inventory management. The other options pertain to different financial metrics or concepts. Total sales minus returns focuses on revenue rather than costs. The gross profit made on a product emphasizes the profitability post-COGS but does not define COGS itself. Operating costs encompass a broader range of expenses beyond just the costs of goods sold, including administrative and selling expenses, which are not factored into COGS calculations.