Is The Change Of Cost Classification Really Zero Sum Game?

Whether the classification of expenses will affect the net profit in the current period will not affect the issue.

Let's take a look at cases and figures.

As shown in the figure below, suppose the column on the left is the cost classification method of the supervisor.

As a result, the new chief financial officer of the company decided that this method was not correct, and that the cost of the shuttle bus should be classified as "other administrative expenses" and "worker bonus" should also be included in other expenses of the workshop.

Let's not discuss which method is more reasonable today. Let's discuss whether the change of classification method will have an impact on current profits.

For one

From the perspective of financial statements, all expenses can be basically divided into two categories: the cost of directly entering into the profit statement, which is called Period Cost, such as administrative expenses, such as administrative expenses, which directly enter the profit and loss account in the current period; another kind of expense, I should pay no attention to it. I do not need to pay two words. It does not necessarily affect the current profits and losses in the current period of expenditure, for example, machine depreciation. It is used as part of the product cost (Product Cost) to enter the asset table.

According to the principle of financial matching, the profit and loss account is only entered during the period of sale.

Back to this case, only the products sold in the current period are sold out, and not many, many of them may be net profits.

In fact, almost no company can make the production and sale exactly the same (including varieties). Therefore, we can basically say that the classification of fees will bring changes.

Influence.

What is the practical significance of this principle in financial practice? First, there is a clear sense of demarcation between non manufacturing and manufacturing costs, that is, the difference between Product Cost and Period Cost.

Any erroneous area classification error or structural change will result in profit impact.

In the same category, there is little problem inside, for example, the classification of bonus will not have any impact, all of them belong to manufacturing costs, and the cost of shuttle bus will be reduced to administrative expenses, which will reduce the cost of warehousing. If the current period is not sold, the profits will be reduced in the current period (these costs go directly to the P1 profit and loss account).

Second, it helps us to appreciate the horizontal comparison better.

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For example, if different subsidiaries of the same group are classified, the performance differences between subsidiaries will produce such financial accounting differences.

Sometimes, it is not the change of the financial department itself, but also the change of the organizational structure of the business department. It is quite common to pform the engineering and Technology Department into the R & D department.

During the period of change, it may be necessary to make a KPI control adjustment.

This comparison can sometimes be a horizontal analysis of the same industry.

Ten years ago, when I was a member of the M & a team, when I was doing the best tune of a acquired company, I found that the gross profit of the Taiwan company belonging to the same trade was very frightening.

A closer look is that their classification is very different from ours. At this time, the current profits must be evaluated by the inventory changes of the company at the end of the year and the beginning of the year. If the inventory changes greatly, the profit discrepancy caused by this classification difference will be enlarged.

In short, the cost classification is not a pure zero sum game, it may bring profit changes in the period and the period, and the difference between the period, financial professionals understand that is enough important.

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