Question Details

Introduction to Accounting and Finance - Guidelines for Costing data

Note: If you have already produced costing information for your assignment - just use this document to check that your costs are realistic in relation to your selling price. These guidelines are optional and intentionally very general.

Marginal Costing Statement / Income Statement

On average, the Cost of Sales for footwear is 58-62% of the sales figure. Cost of sales is the best estimate of variable cost, as this will include direct materials, direct labour and any direct overheads.

If cost of sales is 58-62% of sales, then gross profit margin (gross profit as a percentage of sales) will be 38-42%.

The net profit margin (net profit as a percentage of sales) for footwear is anything between 17% and 20%. The difference between gross profit margin and net profit margin will be a good estimate of fixed costs. (Remember to include depreciation in your fixed costs.)

Other useful statistics:

Direct materials is usually approximately 43-45% of sales figure
Direct labour is usually approximately 15-17% of sales figure

More about the Income Statement..

Cost of Sales:

There are two options:

1.	Use a simplified Cost of Sales which is just materials:

Cost of Sales = opening inventory (which will be zero) + purchases - closing inventory

I recommend you use Option 1 if you have not done any accounting before.
 
2.	Calculate the cost of sales based on variable cost, ie: direct materials, direct labour and any direct overheads.

In the case of Option 1, your Cost of Sales must be consistent with the purchases data in your cash budget.

In the case of Option 2, your Cost of Sales must be consistent with the purchases, direct labour and direct overhead data in your Cash Budget. If you go for Option 2, you will need to show direct and indirect labour costs and direct and indirect overheads separately on your cash budget.
Jane Hancock, Module Leader, Introduction to Accounting and Finance.