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Chapter 3

Management and Organizational Studies 1023A/B Chapter Notes - Chapter 3: Gross Margin, Income Statement, Weighted Arithmetic Mean


Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Maria Ferraro
Chapter
3

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MOS- Cost Flows and Cost Terminology
PRODUCTION AND PERIOD COSTS
income statement must separate product costs from period costs
product costs- associated with getting products or services ready for sale
these costs relate directly to primary business functions, include salaries, depreciation, utility
costs, equipment maintenance and supply
always appear above the line for gross margin
gross margin- revenues less product costs
period costs- do not directly relate to readying products or services for sale, include rent,
advertising, customer services
period costs, which are all costs that are not product costs, always appear below the line for
gross margin
COST FLOWS IN SERVICE ORGANIZATIONS
service firms- offer products that are not tangible or storable
service firms make their facilities available to others for a fee
financial accounting statements provide limited information about opportunity costs
use non-financial data to estimate the controllable costs and benefits of a decision option
financial accounting income statement combines controllable costs with non-controllable costs
and fixed costs with variable costs
COST FLOWS IN MERCHANDISING ORGANIZATIONS
merchandising firms- buy goods from suppliers and resell substantially the same products to
customers
maintain an inventory of goods that they buy and sell
use this inventory to make goods available in the quantities and varieties, as well as on the
delivery schedules, demanded by customers
INVENTORY EQUATION
merchandising firms need to distinguish the cost of goods purchases form the cost of goods
sold
merchandiser buys and stores some items cost of this merchandise flows through the inventory
account, becoming part of cost of goods sold, only when the firm sells the items
cost of beginning inventory+ cost of goods purchased during the period - cost of ending
inventory = COGS for the period
retail firms often buy several batches of an items at different times and different prices,
therefore have several layers of inventory
at time of sale, it becomes necessary to determine which batch or layer the items belong to, in
order to use the corresponding prices to calculate the cost of sales
achieve this by making inventory cost flow assumptions such as first-in-first out (FIFO) or
weighted average
INCOME STATEMENT
except for the inventory account the cost flows in merchandising firms resemble the flows for
service firms
two main cost categories are the costs incurred to obtain and prepare the goods for sale
(product costs) and the costs associated with sales and administration (period costs)
cost of purchasing goods form suppliers includes amounts paid to suppliers and the cost of
transportation and the cost of preparing goods for sale
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