Prior to enter in our main discussion let's know what is the meaning of operating income? Operating income shows a measure of earning strength from ongoing operations of a business organization, equivalent to earning before deduction of income taxes and payment of interests else operating income is called Earning before interest & taxes (EBIT) or recurring profit etc. Frequently operating income is considered as appropriate measure of a management's aptitude to make use of operating assets of an organization. It let us know, a unique assessment of the organizations profitability's tendency than net income. If operating income increases it shows in a net affect in a business operation wherever a manager may decrease cost of the products or commodities or increases in sales volume only. If a company increases its employees salaries in proportion, operating income may unaffected.
Now we’ll penetrate in to the area of increasing business operating income, at this stage we have to understand clearly about followings to ensure operating income:
- Period cost
- Fixed cost
- Product cost
- Revenue
About period cost: This is such type of costs that are not included in product costs. These period cost are expensed on the P/L account or income statement in the period when incurred, either purchased or manufactured goods period cost aren't inclusive as part of the costs. For instances, General & administrative expenses, sales expenses, sales commissions, employees salaries, rent etc are instance of period costs. These items are not period costs such as direct material, direct labor and manufacturing overheads etc.
About fixed cost: Simply, fixed cost are those which doesn't changes with the sales level, if sales decrease or increase but not anything changes then fixed cost remains same as before. Fixed cost is such costs which are associated with the way of time in its place of with the units of output like rent, interest, salaries of permanent employees, depreciation etc. For example, if a company lease on a building premises, in that case, if company has to pay an amount of BDT.15000 each and every month to cover the lease cost but if doesn't produce anything throughout the month, the payment of lease is still due fully.
Product cost: Product cost generally means is a cost of direct materials, direct labor, and manufacturing overhead that are consumed in order to produce a product. Product costs involves in making or acquiring a product. It can be consider or includes the charges which involves during the time of delivery of products or services to a customer. This type of cost can be recorded as an inventory asset if the products remain unsold. Then it is charged to the COGS (Cost of good sold) as early as possible that product is sold then will be treated as an expense in the P/L account or income statement accordingly.
Revenue: As we know revenue is the amount of money and which is before paying for expenses and taking out taxes, for a business organization is it the total amount of money which is received by concerned organization for the services provided or goods sold during a specific time period. Else it may includes all net sales, interest, any other increase in owner’s equity and replace of assets, which is also computed prior to expenses are deducted. For instances, revenue may be treated when money is received during a signing session in a contract or from spot sales collection, when services is given or any other times respectively. Cash basis and accrual basis are the two different accounting methods to recognize revenues in accounting rules. For your clarity, here I am giving a different example, if you make sales of 50 bottles of 200 ml shampoo for BDT. 110 [where BDT. Means Bangladeshi Taka as currency] each then you made BDT. 5,500, this BDT. 5,500 are your revenues in that particular amount if you pay our VAT, Taxes etc then you’ll get your profit. Yes, there is the difference between profit and revenue.
From above writing I think you got an idea about period cost, fixed cost, product cost and revenues. Proper utilization and understanding of these items and techniques shall help to gain your operating income in the respective business.
No comments:
Post a Comment