Gross Margin Accounting

Question 1

What financial records are all business owners legally required to keep? Why is this?

Answer 1

• trading profit and loss account
• balance sheet
  These are kept to keep a records of income, costs and profit for tax purposes

Question 2

What is the issue with financial records? How is this solved?

Answer 2

• they are usually prepared by an accountant for use by Inland Revenue
• they lack the specific details required for management of the business
• to provide this detail a system of gross margin accounting is used, established as distinct from tax accounts

Question 3

What is the formula for gross margin?

Answer 3

Gross margin = net revenue - costs of goods sold

Gross margin = total output - variable costs

Question 4

What does the gross profit margin show?

Answer 4

It is the sales revenue retained by the company after incurring the direct costs associated with producing the goods it sells (and/or the services it provides). A bigger margin can be better but does not take into account the other costs (relating to operating and net profit).

Question 5

What does a higher gross margin mean?

Answer 5

A higher margin means the company retains a higher amount of capital per pound of sales - this can be used to pay costs or satisfy debts

Question 6

Define VARIABLE COSTS

Answer 6

Variable costs are also known as direct costs or cost of goods sold. They are business specific and vary directly with the amount of units sold.

Question 7

What is the formula for variable cost per unit?

Answer 7

Variable cost per unit = Total VC/no. of units sold

VC = TC-FC

Question 8

What are the uses of gross margins?

Answer 8

• they are mainly used for comparative purposes within the farm (between years/decades etc)
• can be used to compare multiple farms
• helps to identify trends and spot issues

Question 9

What are the drawbacks of gross margins?

Answer 9

• the gross margin is not a true representation of profit
• variable costs will not be the same for every business
• land quality and weather conditions can affect inter farm comparisons (i.e. the gross margin does not consider external factors)

Question 10

Define FIXED COSTS

Answer 10

Fixed costs are indirect costs. These do not change dependent on number of units sold.

Question 11

What are some examples of fixed costs?

Answer 11

For a farm, rents and rates (business rates, electricity, gas), labour, buildings and building maintenance, machinery (repairs and buying of, fuel/oil, tax/insurance, depreciation), office, professional fees (e.g. paying an accountant to put together financial information), bank charges and interest on loans.

Question 12

What are some examples of variable costs?

Answer 12

For an arable farm these would be seeds, fertilizers, sprays and casual labour.

For a yard these would be feed, vet and medicine costs, casual labour, farrier, dentists and bedding etc.

Question 13

What is the formula for profit?

Answer 13

Total revenue - total costs

Question 14

Define BENCHMARKING DATA

Answer 14

Benchmarking data is information collected from industry sources to determiene how other firms achieve their high levels of performance. May be financial, marketing, processes, products, strategy and productivity

Question 15

What is the purpose of benching marking data?

Answer 15

• allows strengths and weaknesses of enterprises to be seen
• allows fixes costs to be analysed (often the most significant issues are identified here)
• measures the performance of average and premium units

Question 16

Why should accurate financial records be kept for a business?

Answer 16

Helps to generate accurate management accounts - they need to be relevant and kept up to date.

Question 17

What is an issue with benchmarking data?

Answer 17

Business provide their own data - these are not independently verified and there is always a lag between provision and publication, so they will already be out of date. Also, some data sets are very small and do not provie information of current trends.