Turnover & Margins in Managerial Accounting

• Small Business

|Accounting & Bookkeeping|Accounting

ByDavid Ingram

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Managerial accounting centers around creating internal reports for managerial decision-making. Cost accounting makes up a large part of managerial accounting, and margins offer insight into a company's cost-control effectiveness. Accountants calculate different margins to gain insight into different parts of a business. Inventory turnover can affect economies of scale in companies' cost structures, making it a valuable metric for managerial accounting reports. Understanding the concepts of margin and turnover, and their correlation to managerial accounting, can help you to gain deeper insight into internal financial reports.

Inventory Turnover

Inventory turnover represents the volume of inventory that a company sells in a given period. A higher inventory turnover number can increase both costs and revenues. The key to taking the maximum advantage of higher turnover is to continually generate larger increases in sales revenue compared to increases in expenses. Use the following formula to calculate inventory turnover in absolute dollar terms: cost of goods sold /average inventory value

Gross Margin

Gross margin represents the profit generated on sales over direct costs before considering overhead and other indirect expenses. Gross margin simply presents an absolute gross profit figure in percentage terms. Calculating gross margin qualifies as a managerial accounting technique due to the insight it provides into cost-management practices. Low gross margin figures can result in low or no profitability after other expenses are taken into account. Managers can boost gross margin by finding ways to increase prices or decrease product costs. Use the following formula to calculate gross margin: (gross profit / revenue ) * 100

Contribution Margin

Contribution margin is a cost accounting metric used to express the profit contribution of individual products or business units. Simply put, contribution margin represents smaller, self-contained gross margin figures useful for analyzing smaller components of a business, rather than looking at the business as a whole. Use the following formula to calculate a contribution margin: (specific product revenue – product variable costs ) / product revenue

Correlation

The concepts of managerial accounting, inventory turnover and margins are inseparably linked. Higher inventory turnover can allow a company to achieve economies of scale through volume discounts. Economies of scale reduce product costs without sacrificing quality or reliability, which in turn increases gross margin and individual contribution margins. All of this is useful from a managerial-accounting perspective because it provides feedback into a company's cost structure and profitability.