Profit Model and Extensions

Introduction

The cost accountants use the profit model in an implicit way. It is a deterministic algebraic model of linear type. The basic assumption for this model is that the on subtracting cost from sales profit is derived. Based on this the cost elements model is structured. The cost elements include losses, learning, materials, depreciation, etc. To the spreadsheet modelers this offers an alterable conceptual base. This allows them to perform deterministic simulations, which is a kind of ‘what if’ modeling that allows them to observe the impact of changes in quantity, price and cost.

Model extensions

The fundamental model for profit is sales less costs. Sales are equal to the units or quantity of commodity sold multiplied by the selling price. Total cost consists of two types of costs which are fixed costs and variable costs.

• Production costs: Per unit cost related to production is considered to be ‘w’. Now, when w becomes known it helps in the ascertainment of costs’ behavior at different output level. It is assumed a straight line cost curve exists, where the slope ‘v’ and the constant ‘F’ are divided. Details of the non linear curve for cost, if are available to the modeler then it will be required to define w using the proper function.
• Variable cost elements: Going towards different extensions of the fundamental model of cost, inclusion of other cost elements like direct labor, variable overheads and direct material can be done. When a function of non-linear type is available and considered significant such function may be used in place of the function applied here.
• Depreciation: The entire depreciation rules may be represented like equations showing the curve on the basis of tie. One of the interesting examples is the equation for reducing balance method.
• Valuation of stock: The value of goods per unit represented by w above is undefined. Many alternatives are there to show how value of per unit stock is determined; however, here comparison of only two is to be done. For a company a spreadsheet might be developed using increasing sales level followed by decreasing sales level and constant production.
• Modeling for losses: A manner in which modeling for losses may be done is to utilize the equation where fixed losses, variable losses, production losses and material losses related to profit according to a special formula.
• Percentage Change Model: Variables are likely to be percentage alterations rather than exact amounts. This depicts a serious alteration with approach from above model.

Conclusion

When cost accountants use the profit model they are able to get different results which they convey to the management of the company. The management of the company takes several key decisions based on the reports sent by the cost accountants.

This article has been compiled by Evelyn, who is a writer on various academic topics.