When a company states its financial results in its annual report, it typically presents its income statement in the following way:
Revenue
- ................................ (lost of Goods Sold (including some depreciation)
Gross Profit
- ................................ Selling, General, and Administrative Expenses
- ................................ Research and Development
Depreciation
Operating Profit
+/- .............................. Net Interest (income and expense)
Net Profit before Income Taxes
- ................................ Taxes
Net Profit after Income Taxes
Cost of goods sold" includes all costs directly associated with making a product or providing a service. In retail merchandising this cost is essentially the wholesale cost of goods sold.
Discuss the differences between cost of goods sold and the concept of relevant cost used in this chapter. Are there any situations in which selling, general, and administrative expenses, or research and development expenses might he considered as part of a firm's relevant costs? Explain.