Future Business Leaders of America (FBLA) Agribusiness Practice Test

What is the cost of goods sold?

1. The total sales revenue of the business

2. All indirect costs of doing business

3. Direct costs deducted from revenue

4. The total profit made by the business

The correct answer is: Direct costs deducted from revenue

The cost of goods sold (COGS) refers specifically to the direct costs associated with the production of goods that a company sells during a specific period. This includes expenses such as raw materials, labor directly involved in manufacturing, and any other direct costs incurred to produce the product. By focusing on these direct costs, COGS provides an accurate reflection of the expenses directly tied to the production process, which is critical for calculating gross profit. When calculated, COGS is deducted from total revenue to determine gross profit, which is a key indicator of a company’s financial performance. This distinction is important for businesses as it helps in pricing strategies and managing their profit margins effectively.