Tag Archives | operating expenses

Throughput

Throughput Definition

Throughput is the number of units of output a company produces and sells over a period of time. Furthermore, only units sold count towards throughput. Do not count units produced but not sold during the time period as throughput. The goal of a profit-seeking organization is to maximize throughput while minimizing inventory and operating expenses.

For example, let’s take a company that makes guitars. At the beginning of the fiscal period, the company has no guitars in inventory. But over the course of the fiscal period, the company makes 500 guitars. During that same period, they sell 300 guitars. So this company’s throughput for the period would be the 300 guitars produced and sold that period.

Throughput Variables

There is a formula for calculating throughput. Three variables or three components make up the formula. The three variables include the following:

  • Productive capacity
  • Productive processing time
  • Process yield

Productive capacity refers to the total number of units of output that can be produced in a given time period. Whereas, productive processing time refers to the value-added time in the production process. Then value-added time in the production process is time spent increasing the value of the end-product to the consumer. Process yield refers to the percentage of units of output that are of good quality. For example, if a guitar shop produces 100 guitars but three of them are misshapen and unusable, then the process yield for the guitar shop is 97%.

Calculate productive capacity as the total number of units the process can produce divided by the processing time. Then calculate productive processing time as processing time divided by total time available. And calculate process yield as good units produced divided by total units produced.

Throughput Formula

Use the following formula to calculate the number of units of output a company produces and sells over a period of time:

Throughput = Productive Capacity x Productive Processing Time x Process Yield 

Throughput =    Total Units    x    Processing Time    x    Good Units 
      Processing Time      Total Time    Total Units

Enhancement

You can enhance throughput by either increasing productive capacity, decreasing the processing time per unit, and/or increasing the process yield.

throughput

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throughput

See Also:

Theory of Constraints
Supply Chain and Logistics
Depreciation
Total Quality Management
Work in Progress

Source:

Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

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Proforma Earnings

See Also:
Pro-Forma Financial Statements
Retained Earnings
EBITDA
Operating Income (EBIT)
Financial Ratios

Proforma Earnings Definition

Pro forma earnings are a company’s earnings that exclude rare, extraordinary, or nonrecurring items. Companies may incur expenses that do not reflect typical operating expenses. These expenses, which must be disclosed in financial statements in accordance with GAAP standards, can impact a company’s financial performance in a given accounting period. Proforma earnings exclude these extraordinary expenses in order to provide a clearer picture of the company’s financial performance. You can also call proforma earnings core earnings, operating earnings, or ongoing earnings.

A company’s earnings are a key measure of its financial performance. Creditors and investors examine a company’s earnings to evaluate its financial performance when deciding whether or not to lend to or invest in the company. Compare current period earnings to prior period earnings of the same company to gauge progress over time. Or compare current period earnings to industry peers and competitors to assess the company’s competitive position in the marketplace.

Earnings According to the SEC and GAAP

The SEC requires publicly traded companies to report net income and operating income in financial statements prepared according to GAAP regulations and procedural standards. The investing public scrutinizes these measures of financial performance. However, some businesspeople often consider these income measures to be inaccurate to some degree.

GAAP standards require businesses to include rare, extraordinary, or nonrecurring items in their financial statements. But company executives believe that including these rare, extraordinary, and nonrecurring items in the financial statements obscures the true picture of the company’s financial performance. Therefore, some companies prefer to publish pro forma earnings in their financial statements along with their SEC-required GAAP-standardized earnings.

Proforma Earnings – Explanation

These pro forma earnings, or hypothetical earnings that exclude items deemed rare, extraordinary, or nonrecurring by the individuals preparing the pro forma financial statements, are considered to provide a clearer and more accurate picture of the company’s financial performance for the relevant accounting period. For example, when prepared in accordance with GAAP regulations, a company may show a loss for a given accounting period. However, during that same period, a company can show a profit in its pro forma earnings.

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Proforma Earnings

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Proforma Earnings

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Net Operating Loss Carryback and Carryforward

Net Operating Loss Carryback and Carryforward

What is a net operating Loss carryback and carryforward? A net operating loss occurs when a company’s operating expenses and allowable tax deductions exceed its operating income for an accounting period. Companies pay taxes on operating income. When companies incur an operating loss, there is no taxable income, so they pay no taxes. According to GAAP, companies can take an operating loss in the current period and use it to offset operating gains in past or future periods.

In the U.S., an operating loss can be “carried-back” to offset operating income from previous periods. Or it can be “carried-forward” to offset operating income in future periods. Companies subtract the amount of the operating loss in one period from operating income in previous or future periods. Then they are able to reduce the taxable income in those periods.

According to GAAP, a net operating loss can be carried-back up to 3 years. That is, apply it to any year within three years prior to the year in which the operating loss is incurred. You can carry-forward a net operating loss up to 7 years. Apply the loss to any year within seven years after the year in which the operating loss is incurred.

Net Operating Loss Carryback and Carryforward

See Also:
Net Sales
Net Income
Allowance for Uncollectible Accounts
Company Life Cycle
Dispersion

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Net Income

See Also:
Net Sales
Net Operating Loss Carryback and Carryforward
Financial Ratios
Financial Reporting
Accounts Payable

Net Income Definition

The net income definition is a company’s profit in a given fiscal period. It consists of total revenues earned in the period less total expenses incurred to generate the revenues in the period. When revenues exceed expenses, the company has a net profit. When expenses exceed revenues, the company has a net loss. Report it on a company’s income statement. Net income is an important measure of a company’s profitability and financial performance for the relevant fiscal period. Also, call it net earnings, net profit, or the bottom line.

Net Income Formula

Basically, compute this income by subtracting all relevant costs and expenses from total revenue. Start with total revenue, also known as the top line as it is shown at the top of the income statement. Then subtract the costs of sales, operating expenses, non-operating expenses, and taxes. This gives you NI. It is also known as the bottom line because it is shown at the bottom of the income statement.

NI = Revenues – Cost of Sales – Operating Expenses – Non-Operating Expenses – Taxes

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Net Income

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Net Income

 

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Comprehensive Income

See Also:
Accounting Income vs. Economic Income
Accounting Income Definition
Economic Income
Income Statement
Net Income
Debt Restructuring
Maximizing Your Bottom Line In 3 Simple Steps
Net Profit Margin Analysis

Define Comprehensive Income

Define Comprehensive Income as the overall change in wealth for a company during a period. This includes not only the growth through income and size but also reflects equity changes among the firm as well as market conditions that arise. All of this information is generally summarized on the comprehensive income statement.

Meaning

This type of accounting was established to try and gauge a company better because it is left out of the calculation of net income. This was done because the items in comprehensive income do little to gauge the economic performance of the company. However, this type of income and net income differ in that the comprehensive income effects the assets and liabilities that are reported on the balance sheet.

Comprehensive Income Formula

Use the following comprehensive income formula:

Gross Profit Margin (RevenueCOGS)
Operating Expenses
(+/-) Other Income items
(+/-) Discontinued Operations (add if savings, subtract if loss)
Comprehensive Income

Comprehensive Income Example

For example, Casa entertainment is a company that provides VHS, DVD, TVs, as well as speaker system products to it’s customers. The company invest in securities on the side. They recently discontinued its VHS operation due to the fact that it has become unprofitable. Finally, the company asked Annie an accountant to calculate the comprehensive income given the following information for Casa Entertainment:

Gross Profit = $20 million
Operating expenses = $5 million
Other Income (Profit in Security Investments)= $2 million
Discontinued Operations (Savings from disposal of VHS operations) = $1 million

Thus using this equation above comes out to $18 million dollars.

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comprehensive income

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comprehensive income

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Administration Expenses

Administration Expenses Definition

In accounting, administration expenses are listed on the income statement as operating expenses. Administrative expenses are often included in an expense category called selling, general and administrative expenses, or SG&A. Administrative expenses include items such as administrative personnel wages, rent expenses, and utilities. The most effective ways to manage administrative expenses down are by either cutting overhead costs or laying off administrative personnel.


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Periodic inventory System

 

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administration expenses

See Also:
Example Chart of Accounts for Selling General and Administrative Expenses
Complex Chart of Accounts for Selling General and Administrative Expenses
How to Estimate Expenses for and Annual Budget
How to compensate sales person
Average Cost
Administrative Costs

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3 Things – Overhead Expense Reduction

Discover 3 things you should know about Overhead Expense Reduction in the following video. In the video, Ted Leitch with Expense Reduction Analysts discusses 3 useful tips you should know about reducing overhead expenses.

3 Things – Overhead Expense Reduction

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Overhead Expense Reduction

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Overhead Expense Reduction

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