How is Gross Profit determined in a Manufacturing Business
Manufacturing is a large-scale type of business. It consists of a range of human activity with the primordial concern of creating new products from raw materials. The finished goods or products are then sold commercially.
There are also manufacturing companies which create finished goods for a more complex purpose. Most common of which are manufacturers of computer, appliance and car parts.
Manufacturing basically involves large scale production utilizing extensive amount of capital, heavy-duty machineries and tools, and massive labor. Importing and exporting are also a significant and inevitable aspect of a manufacturing business. Those engaged in any manufacturing business caters for a large group of clientele or market. This must necessarily be so in order to insure profit. In manufacturing, businesspersons must be assured of return of investment as well as profit. Products manufactured redound to retailers or consumers.
Determining Gross Profit
Gross profit is the revenue of profit which a company has after the cost of goods and other expenses have been deducted from the net profit. Gross profit is the residue after costs of operation, production, and sale are subtracted. It is very important for a manufacturing company to determine gross profit. This is because the amount of gross profit indicates whether the business remains in sound condition. The gross profit also tells whether the company resources and supplies are optimized during production and sale. By determining the gross profit, businesspersons will be guided on how to work out management and production issues. It also helps in improving business and thereby become more competitive. Moreover, determination of gross profit or gross income assists businesspersons in increasing profitability because it helps pinpoint the faulty aspect of the business.
There are varied ways of computing or determining gross profit. The first thing to do is to evaluate the income statement. From there, make a list of the variable costs directly involved in the manufacturing business. Among these variable costs are the costs of raw materials, transportation costs, export or import costs, processing costs, packaging costs, and cost of labor. Also include in the computation depreciating assets like company building and vehicles. In order to ascertain gross profit, the total cost of production must be known. To get the total cost of production, sum up the factory overhead and the prime cost. The aggregate amount of the costs of manufacturing comprises the factory overheads. Meanwhile, to get the prime cost, sum up the costs of labor, expenses, and raw materials.
The next step is the determination of the net sales. In getting the net sales, sum up the costs of damaged goods, discounts, missing goods, and returned goods. The result of which must be deducted from the total sale of goods. Thus, a net sale is total sale of goods subtracted by the costs of missing, returned, damaged goods, and discounts. Thereafter, deduct the total cost of production from the net sales. This will give you the gross profit. The gross profit must appear in the company books, accounts, as well as income/loss statement.
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