Operating Income

1
Operating Income

• Capital gains sales in excessive of book value
• Rental/lease payments in advance
• Legacies/trusts
• (Wages)
• Commission on sales
• Return of deposits
• Payment of previously written off debt
• Discount recovered on bulk purchases.

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
2
Capital Inflow

• Share sales
• Loans or debentures
• Share premiums
• Depreciation (in excess of capital expenditure)
• Return of loans
• Liquidation of an investment
• Operating profit (after depreciation less
  dividends and taxes)

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
3
Expenditure

• Operations
• relatively variable
• relatively fixed
• Capital

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
4
Variable Operating Expenses

• Materials Costs
• volume variable dependent on production quantity
• discounts
• quality
• delivery schedule
• JIT
• terms of trade
• availability/competition

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
5
Variable Operating Expenses

• Materials Costs (cont.)
• often largest single component of cost
• can be 40 - 50 of total product cost
• includes freight
• Subcontracts
• specialist services
• labour, equipment, storage
• short and long term

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
6
Variable Operating Expenses

• Wages
• production staff
• theoretically variable
• low skill levels
• poor worker protection
• large casual staff
• piece rates (PBR)
• overtime

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
7
Variable Operating Expenses

• Wages (cont.)
• often practically independent of volume
• high cost of replacement and training
• good industrial relations
• use of sub-contracts
• overtime
• total wage cost incl. extras which can add 25
• leave loading, payroll tax, workers compensation,
  superannuation

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
8
Fixed Operating Expenses

• Factory Overheads
• supervision
• rent
• lease costs
• interest
• insurances
• could be partially variable with staff numbers
• levies

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
9
Fixed Operating Expenses

• Factory Overheads (cont.)
• repairs (depreciation)
• buildings
• equipment
• vehicles

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
10
Fixed Operating Expenses

• Administration Expenses
• general management, sales, office, accounting,
  H.R., legal
• external accounting, auditing, legal costs
• communications
• fax, phone, e-mail, etc
• stationary and sundries

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
11
Fixed Operating Expenses

• Administration Expenses (cont)
• (superannuation)
• bank charges other than interest
• travel
• advertising and promotion
• (bad debts written off)

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
12
Capital Expenditure

• Sometimes referred to as non-operating outlays
• Investments, i.e. shares
• Loans to others
• incl. debentures, convertible notes
• Bank overdraft reduction
• Deposits for services

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
13
Capital Expenditure

• Purchase of capital
• Hire purchase payments less interest
• Capital losses
• Dividends paid
• ordinary shares
• preference shares
• Company taxes

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering