Income Statement Expense Disaggregation

Prior studies of classification shifting in the income statement conclude that managers misclassify core expenses as special items to inflate reported core earnings (McVay 2006; Fan, Barua, Cready, and Thomas 2010). These studies do not distinguish between the core expense components—cost of goods sold (COGS) and selling, general, and administrative expenses (SGA). This study models COGS and SGA separately, and investigates managers’ misclassification of COGS versus SGA to meet different profitability benchmarks. We find that COGS (but not SGA) misclassification is associated with just beating the benchmark of gross margin four quarters earlier. In comparison, both COGS and SGA misclassification are associated with just beating the benchmarks of zero core earnings, prior‐year core earnings, and analyst earnings forecasts in the fourth fiscal quarter. We also investigate real activities management (RAM) of COGS and SGA to meet benchmarks, and find that managers engage in RAM of COGS to achieve the gross margin benchmark, but not core earnings benchmarks. We demonstrate that unexpected SGA contains a significant misclassification effect distinct from RAM, suggesting that future RAM research should consider controlling for expense misclassification. Overall, our study extends prior literature on both classification shifting and RAM.

Discussion

Cost management constitutes an essential element in attaining and maintaining organizational profitability. Understanding the cost structure is essential for effective cost management, as it enables organizations to identify cost drivers, control expenses, and enhance profitability. The purpose of the study is to demonstrate the impact of cost structure on profitability using panel data from the pharmaceutical industry of an emerging country. This quantitative study examined the relationship between costs and profitability using secondary data from the annual reports of 31 companies. The unbalanced panel dataset comprised 180 firm-years. To assess causality, three regression models (Robust OLS, Random Effects, and Fixed Effects) were applied using STATA. The results from the Fixed Effects Model reveal that five out of six variables—Cost of Goods Sold (CGS), Administrative Expenses (ADME), Selling, Marketing, and Distribution Expenses (SMDE), Finance Cost (FINC), and Contribution to Workers' Profit Participation Fund (WPPF)—exert a statistically significant influence on profitability. In contrast, Tax Expense does not demonstrate a significant effect. The model estimates suggest that a one-unit increase in CGS is associated with a 0.9764-unit decrease in profitability. Similarly, a one-unit increase in ADME, SMDE, FINC, and WPPF reduces profitability by 1.0146, 0.9705, 0.8664, and 1.6035 units, respectively. However, the results from the Pooled OLS regression offer an intriguing observation: the WPPF appears to have a positive, albeit statistically insignificant, relationship with profitability. These findings are valuable for managerial decision-making, as they highlight key cost components that should be prioritized for control and reduction to enhance overall profitability.

This study examines the relationship between cost efficiency and firm value in the US restaurant industry, focusing on three main objectives: (1) measuring longitudinal cost efficiency of a restaurant firm, (2) evaluating the impact of cost efficiency on firm value, and (3) examining how business types/strategies – such as franchising, diversification, and internationalization – affect firm value. Using a sample of 25 publicly traded US restaurant firms observed from 2010 to 2019, with a total of 325 observations, the study applies Data Envelopment Analysis (DEA) through a slack-based model (SBM) to quantify cost efficiency and assess its influence on market value, represented by Tobin’s q. The model incorporates net property, plant, and equipment expenses (NPPE), cost of goods sold (COGS), and selling, general, and administrative expenses (SG&A) as input variables, with sales as output variable. A regression analysis further evaluates the effect of business strategies on firm value. The study found a positive relationship between cost efficiency and firm value, with inefficiencies in COGS and NPPE reducing firm value, while SG&A inefficiency shows no significant effect. Additionally, franchised, non-diversified, and international restaurant firms achieve more cost efficiency than non-franchised, diversified, and domestic restaurant firms, highlighting the role of strategic choices in optimizing firm value.

This paper analyzes the composition of cost and selling, general and administrative (SG&A) expenses for the companies listed in the Basic Industry section of NYSE. The method consists on examining the notes from these companies in the year of 2015, in order to identify the elements of cost mentioned in inventories, costs of goods sold (COGS) and SG&A, as well as the frequency of which they are presented. In the data we analyzed, we found that materials and direct labor are the elements most frequently presented by companies on inventories and COGS, while the personnel expenses are the most common element on SG&A. In addition, the most commonly used inventory valuation method for the companies studied is the First in First Out (FIFO). The results provide evidence of divergence between the elements of inventory and COGS on these companies, which may indicate inconsistency in the measurement, classification or presentation of the information. Based on the results, we conclude that the concomitant use of COGS and SG&A information of companies from different continents may affect the development of comparative studies, mainly those dealing with evidence of phenomena in a worldwide scale, such as cost behavior, for example.

This study aims to analyze the effect of Cost of Goods Sold (COGS) on Net Profit at PT Indomarco Prismatama (Indomaret) during the 2020–2024 period. As a key of component in the income statement, COGS has directly relationship with the company’s profitability. This research uses a quantitative method with a simple linear regression analysis approach. The data analyzed consist of secondary data in the form of the company's quarterly financial statements. The results reveal a significant positive correlation between COGS and Net Profit, with a coefficient of determination (R Square) of 0.816. This indicates that 81.6% of the variation in net profit can be explained by changes in COGS. Furthermore, a regression coefficient of 0.791 and a significant p-value below 0.05 indicate that COGS has a significant influence on net profit. These findings confirm that efficient COGS management is a key factor in enhacing company’s profitability. This research is expected to contribute to corporate management in strategic decision-making and serve as a reference for further studies in the fields of finance and accounting.

The traditional model of cost behavior has been criticized for its symmetric cost behavior assumption. A new model has been proposed assuming that costs respond differently to upward and downward activity changes. The main objectives of this paper are to investigate the existence, degree, and nature of asymmetric cost behavior (ACB) phenomenon and examine how the organization life cycle (OLC) affects this phenomenon in the context of Egypt. The current study achieves these objectives by employing multiple regression to explore the behavior of cost of goods sold (COGS), selling, general and administrative cost (SGA), and total cost (TC) for 1577 firm-year observations (99 manufacturing firms) during the period from 2000 to 2019. The results demonstrate that all three cost proxies (COGS, SGA, and TC) are sticky with the highest degree of stickiness to TC. In addition, OLC is a conditional factor that affects how costs behave in response to change in activity level. Consistent with theoretical propositions, both COGS and TC exhibit anti-stickiness behavior for firms in the introduction stage and stickiness behavior for firms in the growth, mature, and shakeout/decline stages. However, SGA is only sticky for firms in the mature stage. However, the hypotheses related to asymmetric behavior of SGA were rejected for firms in the introduction, growth, and shakeout/decline stages.

This paper examines the classification of items within the income statement as an earnings management tool. Evidence is consistent with managers opportunistically shifting expenses from core expenses (cost of goods sold and selling, general, and administrative expenses) to special items. This vertical movement of expenses does not change bottom-line earnings, but overstates “core” earnings. In addition, it appears that managers use this earnings management tool to meet the analyst forecast earnings benchmark, as special items tend to be excluded from both pro forma and analyst earnings definitions.

Prior classification shifting studies pool core expenses together and conclude that managers misclassify core expenses as income-decreasing special items to inflate reported core earnings (e.g., McVay 2006; Fan et al. 2010). Their core expense measure combines cost of goods sold (COGS) with selling, general and administrative expenses (SGA). This study models COGS and SGA separately and investigates the choice of COGS versus SGA misclassification that managers make to meet different profitability benchmarks. We find that when reported gross margin shows a small increase from four quarters ago, COGS (but not SGA) misclassification is more prominent. In comparison, both COGS and SGA misclassification are more prevalent when firms report small core earnings or small increases in core earnings and when actual earnings just meet or beat the analyst forecast in the fourth quarter. Moreover, our study sheds light on real activities management (RAM) research. Specifically, we find that managers engage in RAM of COGS to achieve the gross margin benchmark, but not core earnings benchmarks. For SGA, we show that unexpected SGA contain a significant expense misclassification effect, suggesting the importance to control for expense misclassification effect for future RAM research. Overall, our study extends prior expense management literature on both classification shifting and RAM.

The global financial crisis has created pessimism in terms of prospects of sales rebounding in the future. Therefore, this study aims to examine the stickiness behaviors of firm costs pre, during and post the period of the financial crisis. It uses a sample from the UK chemical industry over the period from 2001 to 2015. The ABJ sticky cost model is applied with the following cost categories: total costs, cost of goods sold, operating costs, selling, general and administrative costs, salaries and benefits, and finance costs. The ABJ sticky cost models are run separately for each cost category over pre (2001-2007), during (2007-2009) and post (2010-2015) the financial crisis. The study finds that total costs have behaved as sticky pre the financial crisis and anti-sticky during and post the financial crisis. Furthermore, cost of goods sold has changed from sticky (pre and during the financial crisis) to anti-sticky (post the financial crisis). Furthermore, salaries and benefits costs have changed from sticky (pre the financial crisis) to anti-sticky (during the financial crisis) and financing costs from sticky (pre the financial crisis) to anti-sticky (after the financial crisis). However, there is no variation in the behavior of selling, general and administrative costs pre and post the financial crisis

In this case study, the fundamental value of Tata Motors has been calculated using one of the most popular techniques of valuation, Discounted Cash Flow Valuation. Ravi Nigam, who is an equity analyst has been given the task to calculate the value of Tata Motors. The first step taken to calculate the value was to prepare the forecasted income statement and balance sheet. In order to do so, the first task was to forecast the sales of Tata Motors for the next coming five years. On the basis of forecasted sales, various items of expenses like the cost of goods sold and selling, general & administrative expenses were forecasted. Subsequently, Free Cash Flow to the Firm was calculated which was discounted by a weighted average of the cost of capital to arrive at the present value of Tata Motors. The terminal value and its present value has been also calculated to complete the valuation process.

In this research, the cosmetics industry’s economies of scale between 2018 and 2022 were explored by examining the cost efficiencies of 20 cosmetics companies through a translog cost function model. The companies’ size was evaluated based on their total revenue and total assets. The study also analyzed the origin of cost efficiencies by considering various cost components such as cost of goods sold, operating costs, selling and general expenses, as well as administrative expenses concerning the total assets of the company. The findings revealed that, on average, larger companies had lower cost of goods sold and operating expenses. However, the cost efficiencies were not distributed equally as some companies showed considerable cost efficiencies, while others exhibited small economies of scale as their size increased.

Reclassifying Core Expenses as Special Items: Cost of Goods Sold or Selling, General, and Administrative Expenses?

Evidence regarding cost behavior mostly comes from big listed companies. Cost behavior of SMEs, which are backbones of economy, is under-researched. This paper intends to fill this gap by providing evidence on cost stickiness from SMEs in an emerging economy. Cost stickiness refers to the notion that costs increase and decrease by differing magnitude for a specific change in the activity volume. Analyses of data for Turkish SMEs from 2013 to 2017 indicate that; total costs, cost of goods sold and selling, general and administrative costs are sticky in varying degrees. Cost stickiness of total costs and selling general and administrative costs reverses following a revenue decline period. The degree of stickiness of all cost categories is positively related to asset intensity and employee intensity while the degree of stickiness of total costs and cost of goods sold is negatively related to debt intensity. The degree of cost stickiness is higher for small revenue decreases than for greater revenue decreases. Finally, firms in different industries have different cost behaviors.

Chocolate cocoa ice is one of the popular beverage products among consumers, especially among teenagers and children. In facing tight competition, it is essential for producers to analyze effective marketing strategies and calculate the Cost of Goods Sold (COGS) to ensure business sustainability. This analysis aims to evaluate the marketing strategies employed, including promotions, distribution, and pricing. Additionally, calculating COGS is necessary to understand the costs involved in production and to determine competitive selling prices. The research method used is descriptive with a qualitative approach, involving socialization, assistance, and training. The results of the study indicate that effective marketing strategies, such as leveraging social media and conducting promotional activities in the surrounding area, can enhance product visibility. The calculation of COGS provides a better understanding of production costs, allowing managers to set competitive selling prices. From this analysis, it is hoped that recommendations can be provided for the PKK group to optimize marketing strategies and cost efficiency, enabling the chocolate cocoa ice business to grow and positively impact the local economy. This research can also serve as a reference for similar businesses in other regions.