COGS or Cost of goods sold refers to the materials and labor costs that go into creating your good/product. Any expense related to the production of the good is included in COGS.
One of the most effective methods to calculate COGS is by adding the direct labor hours and total materials cost. This approach is favored because it is simple and easy to understand. Overhead costs and marketing/sales are excluded in calculating COGS because they are indirect costs.
Its important to know what your businesses COGS is because it is directly related to revenues. COGS decreases revenue, meaning when COGS increases the net income decreases. COGS influence on revenue also affects gross profit and gross margin, since revenue is used to find these two metrics. Look at your COGS often in order to see if any savings or changes can be made to increase overall revenues.