Revenue & COGS

[Harp]

I work for an organization that has 5 major revenue streams. Each of these revenue accounts have 5 Cost of Goods Sold connected to them.

Example:

Parts Revenue is connected to Parts Cost
Parts Labor Revenue is connected to Parts Labor Cost

etc...

My ques is this: what is the advantages to following this closely? To me it makes sense but I have to write a speech for an upcoming meeting and having a hard time putting it into words.

 

[ColinCPA]

Well..you need to follow this closely in order to be able to properly match costs with the revenues they help to generate for recording in the financials. From a management perspective, this would allow you to analyze variances and/or identify opportunities to cut costs for materials, labor, and overhead.

 

[accounting_notes]

Hello HARP, I agree with Colin CPA but would like to add that these sub classifications help in identifying revenues and costs more clearly. For eg: a company sells a part together with its installation; so according to this approach part cost and revenue would be charged in different account head and installation(labor) cost and revenue would be charged in different account head and via this approach all amounts can be traced without any errors.

 

[Counterofbeans]

The advantage is that management can run the business. Without that breakout, it would become very difficult to make operating decisions.

For example, if I came to you and said, "Hey, we made $1M this month," but didn't tell you where the profit came from, how valuable is that?

Management needs this information in order to simply run the business and make operating decisions. Perhaps the selling price of a particular item needs to be reviewed, perhaps one month had a rare cost that came through, etc.