Percent of Sales Method
This technique presupposes that most financial statements vary in terms of sales turnover. Moreover, the technique uses a theory suggesting that the company will perform well financially in future. In this regard, the theory applies many variables to predict the future. It assumes that the variable costs will always depend on the volume of sales realized. It therefore follows that these variables will always be in the form of a percentage of sales in a particular period. For example, a company will assume that the direct cost of materials will always vary with the volume of sales since the raw materials are assumed to drive sales (Trankle, & Gelau, 1992).
Allen Products Inc.
Income Statement. For the year ended July 31, 2010.
b) or quantities it expects to sell in a particular period based on the sales of the previous period. This would determine the current or future sales. However, not all costs will be variable. If the previous period was low, a company may under cast future sales based on poor results. This will lead to the understatement of sales in most situations. A previous period may have good results due to extra-ordinary conditions. If this is used to estimate or forecast future sales, it may give an overestimation of sales. As a result, profits may fall because the sales are overstated. Most companies face this problem. However, some companies have come up with strategies to counter the problem.
Income Statement. For the year ended July 31, 2010.
The pessimist has lower profits in part c than in the first part whereas the optimistic has higher profits in part c than in the first part. This is as explained in part b above.
Metroline Manufacturing
Income Statement. For the year ended December 31, 2009.
Income Statement. For the year ended December 31, 2009.
Reference
Trankle, U.G., & Gelau, C. (1992). Maximization of subjective expected utility or risk control, experimental tests of risk homeostasis theory. Ergonomics, 35(1), 723.