The classification of costs in CTC’s income statement is on the basis of the business’ operations. This means that the listing of expenditures covers aspects that affect its productivity. The expenses of the firm are on the basis of employees’ wages, costs of production, logistical costs and utility expenses. This classification is internal because it focuses on the company alone. However, there is the need to include other crucial expenditures such as interest expenses and taxes in order to get comprehensive information on the scope of the business.
The calculation of the estimated cost of goods manufactured considers the production expenses. In other words, there will be the factoring in of the wages, cost of purchases and utility costs of production. From the expenditure list, there will be the exception of the expenses that do not directly affect the production of finished goods. This total expense is $677,000 while the estimated cost of goods sold tops up the remaining amount in expenditures. Therefore, from a total expense outlay of $925,000, $248,000 is the Company’s total cost of sales.
Revised Income Statement ($)
Factory wages 365,000
Council Rates 5,000
Sales staff 110,000
Total Expenses 600,000
Net profit 380,000
There are some changes between the above income statement and the original one. The first change involves a matter of bookkeeping because the cost of goods sold and the depreciation cost are not in the income statement. The cost of goods sold goes into the trading, profit and loss account and is in under the sales bracket. The inclusion of the cost of depreciation is on the balance sheet, where it reduces the value of the assets.
The balanced scorecard approach is an excellent recommendation for making a format that will analyze the company’s costs. It incorporates a variety of metrics that affect the overall progress of the business. These metrics, in turn, influence the business’ operations and have an effect on revenue. Therefore, using this approach to manage costs will split the operations of the organization into consumer metrics, financial metrics, employee evaluation and business performance measures. This precise approach to analyzing the costs within the operations of the organization will allow the business owner to account for cash flow.
There are several factors that influence the cost of a product and position it will take in the market. Thus, basing the costs of the organization’s products on the cost of direct materials and labor is risky. This is because there are other crucial market conditions that can easily cause the sales of the business to decline. Although the direct initial costs need factoring in into the financial future of the organization, an analysis of the progress of the competitors is crucial. It is also imperative to keep in mind that the prevalent market demand should be the additional bases for determining the prices of products.
The company should stop using incomplete records to put down its financial information. Incomplete records are a slow method of recording information and often leave room for errors. In addition, it would be beneficial for the company to adopt the International Accounting Standards to report each financial activity. These recommendations will increase the ability of the business to thrive in the current market conditions.
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