Very little detail for sales revenue and expenses are included when presenting a profit model, in order to keep the template as brief as possible. After arguing for the separation of fixed and variable expenses, you shouldn’t be surprised to see a template dividing operating expenses according to how they behave relative to sales activity.
There are just four lines for expenses — cost of goods sold, two variable operating expenses, and fixed operating expenses.
Conceivably, such a template could be the first, top-level page for the formal P&L reports to managers. The following pages would have more detailed information for each line in the profit template. The additional information for each variable and fixed expense would be presented according to the object of expenditure basis.
For example, depreciation on the profit center’s fixed assets would be one of many items listed in the fixed expenses category. The amount of commissions paid to salespersons would be listed in the revenue-driven expenses category.
Profit reports are prepared as frequently as needed by managers, monthly in most cases. Interim P&L reports may be abbreviated versions of the annual report. Keep in mind that this example is for just one slice of the total business, which has other profit centers each with its own profit profile.
The profit template includes sales volume, which is the total number of units of product sold during the period. Of course, the accounting system of a business has to be designed to accumulate sales volume information for the P&L report of each profit center.
Generally speaking, keeping track of sales volume for products is possible, unless the business sells a huge variety of different products. When a business cannot come up with a meaningful measure of sales volume, it still can classify its operating costs between variable and fixed, although it loses the ability to use per-unit values in analyzing profit and has to rely on other techniques.
