Module 117 min2001 wordsFree — no account
The income statement, line by line
The module’s worked examples, then cases to attempt before revealing their solution · 2 sections · 330 words · 3 min
Worked example
Two workshops, the same turnover, two different trades
Two workshops each invoice 480 000 €. The first buys 192 000 € of materials and pays 205 000 € in staff costs. The second buys 310 000 € and pays 90 000 €. Both post 12 000 € of operating profit. The first mainly sells labour, the second mainly sells transformed material. A 5 % rise in material prices costs the first 9 600 € and the second 15 500 €: the same result does not carry the same exposure.
Practical case
Find the line that ate the margin
Nadia's workshop invoiced 512 000 € last year for an operating profit of 31 000 €. This year turnover falls to 480 000 € and profit to 12 000 €. Purchases consumed go from 200 000 € to 192 000 €, staff costs from 198 000 € to 205 000 €, other external charges from 59 000 € to 47 000 €, depreciation from 24 000 € to 24 000 €. Express each item as a percentage of turnover for both years, then say which item explains most of the fall.
Hint: Euro amounts mislead when turnover moves. An item that falls in euros may well have grown in weight.
Show the solution
As a percentage of turnover, purchases consumed move from 39,1 % to 40,0 %, less than one point. Other external charges fall from 11,5 % to 9,8 %, which improves the result. Depreciation moves from 4,7 % to 5,0 %, the mechanical effect of falling turnover on a fixed charge. Staff costs, however, move from 38,7 % to 42,7 %: four points of turnover, roughly 19 200 € at this year's activity level. It is the only item whose weight clearly deteriorates, and on its own it explains more than the total fall in profit, since other external charges pulled the other way.
Answer: Staff costs: their weight moves from 38,7 % to 42,7 % of turnover, roughly 19 200 € at this year's activity level.
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