Chapter 20, Problem 1BTN

To determine

1)

Introduction:

Cost of Goods Sold:

• Cost of goods manufactured is the total cost of producing goods that are later sold to realize revenues. It includes direct and indirect materials, labor and overhead.

• Cost of Goods sold is used to compute the cost of producing goods and selling goods for a particular period.

• Cost of Goods sold comprises of Cost of Materials, Labor and Overhead attributable to goods manufactured i.e. Cost of Goods Manufactured as well as selling and distribution costs such as shipping and handling expenses.

Contingent expenses and contingent liabilities

• These are expenses and liabilities that are conditional in nature and their future occurrence is conditional on the happening or not happening of certain events.

• An example of this category of expense and liability are warranties. Warranty expenses and warranty liability refer to the costs of repairing defect products that have been sold and are in the warranty period.

• Every sold finished good comes with a warranty. A warranty can be invoked when the product is defective and there is no fault of the consumer. Warranty costs are recorded as estimates based on studies and past trends in the financial statements.

To Determine:

Why shipping, handling and warranty expenses are included in the cost of goods sold.

To determine

2)

Introduction:

Effect of costs on Profits

• Profitability analysis takes place after costs have been allocated and bifurcated into direct and indirect costs.

• Direct costs are costs directly attributable to cost of goods sold such as material, labor and overheads. Indirect costs are costs indirectly attributable to cost of goods sold such as selling and distribution expenses.

• Inclusion of items such as of shipping, handling and warranty expenses in the cost of goods sold leads to reduced profitability and has an adverse impact on ratio analysis of financial statements.

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

• Examples of Ratios for analysis of financial statements includes Net profit Margin Ratio, Asset Turnover ratio etc.

To Determine:

Effect of inclusion of items such as of shipping, handling and warranty expenses in the cost of goods sold and analysis of financial statements.

To determine

3)

Introduction:

Cost of Goods Sold:

• Cost of goods manufactured is the total cost of producing goods that are later sold to realize revenues. It includes direct and indirect materials, labor and overhead.

• Cost of Goods sold is used to compute the cost of producing goods and selling goods for a particular period.

• Cost of Goods sold comprises of Cost of Materials, Labor and Overhead attributable to goods manufactured i.e. Cost of Goods Manufactured as well as selling and distribution costs such as shipping and handling expenses.

Contingent expenses and contingent liabilities

• These are expenses and liabilities that are conditional in nature and their future occurrence is conditional on the happening or not happening of certain events.

• An example of this category of expense and liability are warranties. Warranty expenses and warranty liability refer to the costs of repairing defect products that have been sold and are in the warranty period.

• Every sold finished good comes with a warranty. A warranty can be invoked when the product is defective and there is no fault of the consumer. Warranty costs are recorded as estimates based on studies and past trends in the financial statements.

To Determine:

If policy with respect to costs included in cost of sales have changed.