Using cost structures with incomplete records
If we know what the relationship between sales revenue, cost and profit is we can use this information to help us to deduce missing information. The two different relationships you need to know about are margins and mark-ups, these are key in an incomplete records question.
- Margin
A ‘margin’ is the percentage of sales revenue that profit represents. I think of it as ‘margin on sales’ as you would multiply the percentage margin by the sales revenue.
o Using margin to identify cost
If sales are £100 and your margin on sales is 10%, then you must have made a profit of £100 x 10% = £10. We can use this information to deduce that our costs must be the sales revenue less the profit which is £90! Alternatively, you can think of it this way: if profit is 10% of sales then costs must be 90% of sales and £100 x 90% = £90 cost.
o Using margin to identify sales
If you know that your margin on sales is 30% then your costs will be 70% of sales. If you know that your costs are £140 (and that this is 70% of sales) then you can deduce that sales must be £140/70% (or £140/0.7) giving £200!
- Mark-up
A ‘mark-up’ is the percentage of cost that profit represents. I think of it as ‘mark-up on cost’ as you would multiply the percentage mark-up by the cost.
o Using mark-up to identify sales
If cost is £500 and the mark-up is 10% then the profit will be £50. Sales must be the cost plus the profit which is £550! Another way to look at this is that since we add the mark-up of 10% to the cost, the sales will be 110% of the cost and £500 x 110% (or £500 x 1.1) is £550.
o Using mark-up to identify cost
With a mark-up of 20% you know that sales will be 120% of (or 1.2 times) cost. If sales were £360 then we can deduce that cost must have been £360/1.2 = £300!
Using control accounts in an incomplete records question
If we know some of figures that would sit in a control account we can often establish a missing figure using a ‘balancing figure’ approach.
For this type of question having a good grasp of double entry bookkeeping is useful, you may find this blog useful.
- Sales ledger control account (SLCA)
If we know that the opening balance on the SLCA is £100 owed to the business, that cash receipts from credit customers in the period were £500 and that the closing balance on the SLCA was £120 then we can deduce the value of credit sales made by balancing off the ledger account:
Sales ledger control account (SLCA)
|
|
£ |
|
£ |
||||
|
Opening balance (known) |
100 |
Receipts (known) |
500 |
||||
|
Credit sales (BF) |
|
520 |
|||||
|
Closing balance (known) |
120 |
||||||
|
620 |
620 |
||||||
| . | |||||||
So we can deduce that the incomplete record, credit sales, must have been £520.
- Purchase ledger control account
If we know that the opening balance on the PLCA is £250 owed by the business, that cash payments to credit suppliers were £700 and that the closing balance on the PLCA was £280 then we can deduce that the value of credit purchases must be:
Purchases ledger control account (PLCA)
|
|
£ |
|
£ |
||||
|
Payments (known) |
700 |
Opening balance (known) Credit purchases (BF) |
250
|
||||
|
. |
|
|
|||||
|
Closing balance (known) |
280 |
||||||
|
980 |
980 |
||||||
| . | |||||||
Credit purchases must be £730.
Using cost of sales with incomplete records question
Cost of sales (COS) consists of three key elements. It is calculated by adding opening inventory (1) to purchases (2) and then deducting closing inventory (3). If we know what the COS figure is, and we also know two of the elements that make up COS, we should be able to deduce the third.
Let’s say that COS is £5,000, and that we know that opening inventory (1) was £1,000 and that purchases (2) were £5,200, but we don’t know the value of closing inventory (3). Taking opening inventory plus purchases would give £1,000 + £5,200 = £6,200 so to get back to COS of £5,000 we must be deducting closing inventory of £1,200!
Here’s an incomplete records question for you to try. Once you have finished your answer you can watch me work through my solution below.
At 1 January a business has inventory of £10,000 and trade payables of £40,000. During the year the business made sales of £400,000 and achieved a profit margin of 25%. They paid credit suppliers a total of £290,000 and at the end of the year trade payables were £65,000. On 31 December, a fire in the warehouse destroyed all units of inventory. Can you help Sherlock Holmes to identify the value of the inventory destroyed?
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