Outsourcing Manufacturing to China

What has led to an increase in outsourcing manufacturing to China?

Many reasons have led to the current interest in outsourcing manufacturing activities to China in recent years. Strong economic growth and the easing of government regulations have made companies consider China for manufacturing. MNCs can take advantage of cheap labor in the interior provinces but must watch out for more expensive labor near the coast.

Firms interested in doing business in China must also respect local officials and regulations if they desire to be successful.

Revenue Recognition Definition

Revenue recognition is an accounting term used to refer to the recording of a sale or service with a journal entry into a company's accounting records. Revenue will be recognized only when certain criter has been met. This criteria for revenue recongnition includes:

1. The work has been substantially completed by the company for a customer.

2. Cash or a secured future payment (credit note) has been received by the company

Operating Expense to Sales Ratio

The Operating Expense to Sales Ratio displays in a ratio format a company's operating expenses as a percent of its total net revenues, most often per quarter.

Formula for the  Operating Expense to Sales Ratio 

Total Overhead Cash Expense / Net Revenues

This ratio is  considered a measure of the total overhead used in the manufacturing firm per net sales revenue dollar

The most important information revealed by this formula is the efficiency of a company's overall cost structure and it also indicates the ability of its business operations to convert income to profit.

For example, a company experiencing larger and more stable cash flows can sustain a higher operating expense to sales ratio than a smaller company with much less stable operations. 

Management can use the information gained from this ratio in order to manage cost and ensure the long term profitabilty of a company. 

Other Financial Ratios:

Ratio Analysis Financial Control

Calculate Gross Margin Financial Ratio

Expanded ROA Equation

Calculate Fixed Ass Turnover Ratio

Revenue Recongnition Principle Defintion

What is the Revenue Recongnition Principle in Accounting?

It is one of the most important accounting principles along with the matching principle. It is used to determine the correct accounting period to record when revennues are earned and expenses paid. One important aspect of this principle is that revenues are recognized when  realized or realizable and that they are recongnizable when earned.

This is quite different than cost accounting. In cost accounting revenues incurred by a company are reccorded when cash is received no matter when the product or service is actually given to the customer.

 

   

What are Trade Discounts?

What are Trade Discounts?

Often when dealing with customers, companies will offer trade discounts in order to entice larger sales. Trade discounts are deductions from list prices offered, to special customers, for quantities purchased or for the purpose of establishing different price levels for different classes of customers, such as wholesalers and retailers.

Trade discounts are also used so that vendors can change the effective prices of prodcuts included in catalogs by issuing a revised discount sheet.

Revenues should be recorded after deduction of such discounts.

What is a Deffered Expenditure

As deffered expenditure is a type of  expenditure when payment has been made or a liabilityhas been incurred by a company but which is carried forward on the assumption that it will benefitthe company over a subsequent periods in the future.  In accounting it is also commonly referred to as deferred revenue expenditure.