GROSS MARGIN AFTER COST OF SALES

The first step in evaluating the economic situation of any type of business is to ascertain the gross realizations, i.e.

number of units sold multiplied by unit price.

Based on accounting results, the following statistical data should be available:

• for the business in total
• for the various types of marketing outlets (cost/profit centers)
• for the various types of producing or service units (cost units).

The next logical step is to determine the gross margin direct allocatable cost of sales for each individual type of marketing outlet (also see chart 1):

Gross Realization

• Direct Allocatable Marketing Expense/Cost of Sales
• Gross Margin after Direct Allocatable Cost of Sales

The value of this first line gross margin already allows a rough estimate of the relative profitability for the individual marketing outlet.

The third step leading to the final gross margin after cost of sales necessitates a full cost analysis of the individual cost center. Essentially this requires allocating the labor costs of selling and costs of purchased goods.

Furthermore, the operations own production costs must be distributed to the various marketing outlets. A number of methods for the definition of a distribution key for the fixed costs are available. In this case the respective share is the % proportion of the total firm for each cost center. (A more accurate procedure would require compiling the quantities of individual producing costs).

When the allocatable indirect cost of sales (out of pocket and calculated costs) are then accounted for, the final line margin after cost of sales has thus been determined:

Gross Realization

• Direct Allocatable Marketing Expense/Cost of Sales
• Gross Margin after Direct Allocatable Cost of Sales
• Allocatable Labor Costs of Selling, including Assumption for Owner's Wages and Salaries
• Cost of purchased Goods
• Distributed Costs or Values of own Plant Production
• Fixed (Out of Pocket and Calculated) Costs of Total Business
• Gross Margin after total Cost of Sales (and of own Production)

Download Adobe Acrobat Reader (free software to read PDF files)