Which of the following best describes the cost of sales (COGS)?

The cost of sales, or cost of goods sold (COGS), directly refers to the expenses a company incurs to produce the goods it sells or the services it provides. This includes costs such as raw materials, labor directly involved in production, and manufacturing overhead that can be directly attributed to the production process.

Understanding COGS is crucial because it plays a significant role in determining a company's gross profit. By subtracting COGS from total revenue, a company can assess its efficiency in managing production costs relative to sales. This metric is particularly important in financial reporting, as it provides insights into operational efficiency and profitability.

The other options provided do not accurately represent the definition of COGS. All expenses necessary to run a business encompass operating expenses, which include selling, general, and administrative costs, rather than focusing solely on production costs. Local and federal income taxes pertain to a company's tax obligations and are not considered part of the cost of sales. Non-operating expenses relate to costs incurred that are not associated with the core business operations, such as interest expenses or losses from the sale of assets, further distinguishing them from COGS.