How to Use QuickBooks Data for Profit-Volume-Cost Analysis - dummies

How to Use QuickBooks Data for Profit-Volume-Cost Analysis

By Stephen L. Nelson

You need three items of data in order to perform profit-volume-cost analysis in QuickBooks 2011: sales revenue, gross margin percentage, and fixed cost. Typically, these items of data aren’t difficult to find if you’ve been using QuickBooks. Nevertheless, this data doesn’t map perfectly to line items that appear on a QuickBooks income statement.

Sales revenue

The sales revenue levels that you use in the formula are the sales revenue levels that you want to experiment with. They probably represent possible or maybe even likely sales revenue levels for your business. Accordingly, the sales revenue levels don’t really come from QuickBooks. Of course, you may want to look at past income statements in order to determine reasonable or likely sales revenue levels. However, the formula inputs are probably just rough estimates; they don’t actually come from a QuickBooks income statement.

Gross margin percentage

The gross margin percentage is calculated by subtracting your variable costs from your sales revenue and then dividing that result (which is the gross margin) by the sales revenue. The variable costs include the costs of the items that you sell: inventory, commissions, shipping, and similar costs.

Variable costs vary with the sales revenue. If a sale occurs, the sale produces variable costs. If no sale occurs, no variable costs are incurred.

Typically, the variable costs equal the cost of goods sold number that’s shown on your QuickBooks income statement. This cost of goods sold number probably includes the inventory items that you sell (if you’re in a business in which you resell inventory) and other items, such as freight and sales commissions. You can, therefore, get most or all the variable cost information right off the QuickBooks income statement.

You may need to fiddle with the cost of goods sold amount reported on the QuickBooks income statement. Remember that variable costs are those costs that vary with sales, and, as a result, some of the costs that you’ve included in the cost of goods sold section of your income statement may not be variable. Some of the costs reported in the regular operating expenses portion of your income statement are actually variable.

If you realize that the cost of goods sold value isn’t a good estimate of variable costs, make some adjustments. A fixed cost that’s included in the cost of goods sold number should be subtracted, obviously. And a variable cost that’s included with the other operating expenses may need to be added to the cost of goods sold.

Fixed costs

Fixed costs include all your other non-variable costs. In a nutshell, fixed costs are fixed because they don’t change with sales volume. Fixed costs include items such as rent paid on an office or factory, salaries paid to permanent employees, overhead for insurance, and so forth.