Gross Margin - The warning message - Part II

Gross Margin analysis becomes vital for every organisation as it helps us to track activities across various spectrum of the organisation. Movement / Changes in Gross Margin occur mainly due to :

1. Change in Raw Material / Packing Material purchase price
2. Change in rates of Sub-contractors who helps company to sub-contract certain manufacturing process
3. Change in manufacturing costs - direct overheads
4. Change in Selling price
5. Change in product mix when compared to previous period
6. Change in customer mix when compared to previous period
7. Change in logistics costs for both inward rawmaterials and outward finished goods
8. Abnormal activities in purchasing like "Air-Freight", "One off purchase at high cost", "purchase of alternative material at high cost due to non-availability"
9. Abnormal activities in manufacturing like "Higher operation costs due to power cuts", "lower yield duirng the month"
10. Abnormal activities in sales like "one-off quantity discount to a customer", "offer price to a large volume customer", "non moving sales"
11. Abnormal cases where management takes a strategic decision on either a particular raw material or production process or particular customer at a different price structure

In Short, Gross Margin analysis runs through the entire length and breath of the organisation, it tracks movements in purchasing, sub-contracting, manufacturing, logistical points, sales point & management decisions. If an accountant tracks the gross margin movement of products he will have on his palm top data on all the activities of the organisation, with which reports can be generated so that decisions can be taken on them.
Gross margin analysis is the fulcrum which helps an accountant to provide management with vital details about profitability and hence is a very important and indispensible tool.