(1)Expense
“Expense” refers to the money that a corporation must pay in order to carry out business activities. The major categories of cost are summarized below.
Variable cost
Expenses that vary with profit including the cost of goods sold,
product shipping, etc.
Fixed cost
Expenses that do not vary with profit including cost of equipment, labor, etc.
Selling, general
and administrative expense
All expenses involved in manufacturing products and sales including the cost of operating sales, general administration, etc.
Also referred to as “operating expenses.”
(2)Profit
“Profit” is the amount of money left after subtracting expenses from sales.
There are several ways to calculate profit in accountancy.
The typical methods of calculating profit are summarized below.
Gross profit
Profit calculated by subtracting cost of goods sold from sales.
Gross profit = sales – cost of goods sold
Operating
income
Profit calculated by subtracting Selling, general and administrative expense from gross profit.
Operating income = gross profit – Selling, general and administrative
Ordinary income
Operating income plus non-operating income, less non-operating expenses.
Ordinary income = operating income + non-operating income – non-operating expenses
These forms of profit are calculated in an “income statement.”
(3)Break-even point
The “break-even point” is where sales and expenses are equal, resulting
in zero profit or loss. This is referred to as “break-even revenues.”
The break-even point is calculated so that it is possible to identify a “profitable line,” where any revenues above the break-even point can turn in a
profit.
Break-even revenues can be calculated as follows.
Reference
Non-operating income
“Non-operating income” is interest received, dividends, and other income received apart from the operation of the
business.
Corporate and legal affairs
The original cost of purchasing materials and manufacturing
products.
Chapter 1
Cost
Reference
Non-operating expenses
“Non-operating expenses” are interest
paid and other expenses incurred apart
from the operation of the business.
Reference
Income statement
Refer to “1-1-3 2 ( 2 ) Income statements.”
Unit contribution margin
Break-even revenues = fixed cost ÷ (1 – (variable cost ÷ revenues))
Unit variable cost
Unit variable cost
The proportion of revenues accounted for by variable cost.
variable cost ÷ revenues
Unit contribution
margin
The proportion of revenues accounted for by profit.
1 – unit variable cost
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