Cost and Industry

Now let's take a look at how cost affects the finances of companies in the different industry categories: service, merchandising, and manufacturing. Exhibit 4.4 illustrates a simplified income and expense statement for fictitious companies in each industry. The statement is somewhat simplified, containing only those expenses that directly relate to operating a company and giving net operating profit (what is left before the company pays taxes, interest on debt, and accounts for depreciation and amortization; also known as EBITDA).

Exhibit 4.4 Cost and Industry


Service Industry

At first glance, it seems like the service industry has the simpler situation. All of the expenses are categorized as direct client expenses and are presumably period costs that are expensed in the period in which they are incurred. This would certainly be true of any service company that does consulting for a fee. However, when we explore the range of service companies, it becomes apparent that it is not that simple.

An example of a service company might be an actuarial firm that provides advice to clients on retirement programs. The company is paid a fee for the services and in turn pays its consultants for performing the work. Let's suppose that a client contracts the actuarial company to create a piece of software that provides the same advice in a fashion that makes it easier for the ...

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