Cost of goods sold (CGS)
Cost of Goods Sold (CGS) is the total cost of acquiring raw materials and turning them into finished goods. CGS normally does not include costs which apply to the whole enterprise, or to selling, general and administrative expenses.
CGS generally has three main components: direct labor, direct materials, and manufacturing overhead.
In financial reporting, cost of goods sold is a cost category on the income statement, as shown on the simple example below. Cost of goods sold is subtracted from net 
sales revenues to produce the reported gross profit. (Gross margin is the gross profit expressed as a percentage of net sales).
The income statement shows reported gross profit for the company, but management usually has a high interest in knowing gross profits for individual product lines and individual products, as well. Such information is crucial for effective product management and product strategy decisions, for instance. For product gross profits, actual sales revenues, actual direct materials, and actual direct labor costs can be estimated rather directly. When manufacturing overhead supports multiple products or product lines, however, the overhead costs for specific products may have to be determined by an arbitrarily set allocation percentage.
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