Chapter 13 – Getting To Gross Profit

Overview

Gross profit is sales less costs of sales. This chapter examines these costs arithmetically. It looks at product and production costs and inventory calculations – how you analyse, interpret and forecast them. It then pulls them together with the sales forecast you made back in Chapter 10 to arrive at gross profit. The next chapter brings in the other costs to arrive at the all-important figure for net profit.

Mastering sales, production costs and inventory management

After reading this chapter, you should be able to answer the following questions:

• What are sales revenue/turnover and the cost of sales?
• How important is the concept of gross profit?
• On what basis might you set prices?
• What are the relevance of direct and indirect/fixed and variable costs?
• What are product costs?
• What is inventory?
• How would you value inventory; what are the relative merits of specific costs, averaging, FIFO and LIFO?
• How does inventory valuation affect your tax bill and the interpretation of financial reports?
• How would you project your cost of sales and gross profit?
• What bookkeeping entries are passed to record movements in inventory?