Hi,
the CFA text book state that depreciation expense is included in COGS and/or SG&A, i thought depreciation is treated as a separate/individula item, instead of including in COGS, in Income Statement. is it true?
also, it says higher depreciation expense in COGS lower gross margin and operating expenses, but doesn’t affect operating margin. if higher depreciation expense increases COGS, which results in lowers the gross profit (revenue - COGS) and hence lower gross margin. however shouldn’t operating expenses be higher? let’s assume operating expenses are lower, revenue stays the same, operating income is lower, which leads to lower operating margin. am i missing something here? please help explaining what i am missing here. thanks.
I think it’s saying that a higher proportion of depreciation expense is allocated to COGS, but the entire amount of depreciation expense stays the same.
Sales 2000 Sales 2000
COGS 500 COGS 700 (due to depreciation of inventory, assuming impairments here, could be wrong)
Gross 1500 Gross 1300
OpEx 500 OpEx 300
EBIT 1000 EBIT 1000
Margins stay @ 50%
Do you have a page number so I can take a look?
Yes, that’s what they’re saying.
Total depreciation’s constant, just the split between COGS and SG&A changes.
Are we considering the depreciation associated to COGS to come from inventory impariments?
thanks all. this content is under Long-Lived Asset–> Estimates required for depreciation calculation.
it makes sense if depreciation stays constant…