Topic 9- Gross Margins Flashcards
Explain the purpose of a ‘gross margin’
The purpose of a gross margin is to measure of an enterprise’s financial (and to some extent physical) performance.
Explain the 2 components which comprise a gross margin.
Enterprise income
- refers to the enterprise’s gross income which is the income earned by that enterprise before the costs incurred in producing that income are taken into consideration.
Enterprise variable
- costs are those costs which vary directly with the level of enterprise activity, and which can be specifically allocated to an enterprise.
What are the sources of information used when deriving a gross margin?
The sources of information used to derive a gross margin are the enter[rises trading account, the cash flow statement, and the various financial records (sales and purchases invoices) and physical records (manager’s diary) maintained in the business.
How does a gross margin (account) differ from: a gross margin budget?
A gross margin account is comprised of historical information and reports on the actual financial performance of the enterprise. A gross margin budget utilises forecast information and therefore reports on the expected future financial performance of the enterprise.
How does a gross margin (account) differ from: a net margin?
A gross margin incorporates variable costs only, whereas a net margin incorporates both variable and fixed costs.
Explain the meaning of each of the following gross margin performance indicators.
- gorss margin per hectare
Gross margin per hectare - indicates the gross margin earned by each hectare over which the enterprise is operated.
Explain the meaning of each of the following gross margin performance indicators.
- gross margin per DSE
Gross margin per DSE - indicates the gross margin earned by each DSE run in the enterprise
Explain the meaning of each of the following gross margin performance indicators.
- gross margin per $ invested
Gross margin per $ invested - indicates the gross margin returned by each dollar invested in the
enterprise.
Explain how the number of hectares are calculated for the GM/Ha
- calculating the average livestock units (DSE - Dry Sheep Equivalent) for each livestock enterprise, between the beginning and end of the period.
- adding the average DSE’s for all enterprises to give the total average DSE for the property.
- multiplying the total area grazed, by the proportion of each enterprise’s average DSE to the total average DSE. This will result in the area grazed by the particular enterprise.
Explain how the DSE is calculated for the GM/DSE
The number of DSE are calculated by multiplying each class of stock within the enterprise by their respective DSE ratings, and then adding the DSE’s for each class together to get the total DSE’s for the enterprise.
Explain how the $ invested, are calculated for the GM/ $ invested
The $ invested in each enterprise is calculated by adding the average value of stock on hand during the year (opening + closing value divided by 2) and the average value of the machinery
and other facilities utilised by the enterprise. The average value of the machinery and other facilities utilised by the enterprise will take into account the particular enterprise’s proportionate use of these items relative to the use made by other enterprises.
What is the purpose of a gross margin budget?
The purpose of a gross margin budget is to indicate the likely economic return of an enterprise. When gross margin budgets are completed for a number of alternative enterprises, the enterprises can be ranked in order of likely profitability.
Distinguish between a gross margin account and a gross margin budget.
A gross margin account measures the past performance of an enterprise whereas a gross margin budget forecasts the anticipated or likely future economic performance of an enterprise.
