Last week, we set up this fictitious company as a vehicle to familiarize you with how to read financial statements so you can better understand how your company is doing. The first thing we will look at is the Income Statement (Figure 1). The report is in thousands of dollars, so the income for 2008 is $33 million.
The first thing you see is a drop in revenue of $7 million from 2007 – a 17.5% drop. For this company, the cost of the manufactured products is divided into the cost of the material used, the cost of the direct labor required and the cost of the manufacturing overhead. These will not be the actual money spent for all of the material and labor for the year. These are the costs accrued against the goods sold for that year. Manufacturing overhead reporting will vary from company to company. For Acme, overhead includes the cost of unapplied time, manufacturing supervision, warehousing and freight costs, and any engineering costs directly expensed against the shop.
It is useful to put percentages of the various cost items against the revenue figure. When we do this, we see that the material costs are 28.7% of revenue for 2007 and 30% for 2008, labor goes from 20% to 20.9% in 2008, and overhead goes up to 12.1% from 12 % in 2007. These increases are not unusual for a recession year. The gross profit margin drops from 39.2% to 37%.
Next week ,we’ll look at the other half of the income statement – expenses and profit.