. Retailers often create break-even analyses to determine the level of sales and must achieve every day to pay the operating costs of their company. Managers will use this information to determine profit margins needed to achieve a certain level of income. Retailers may also review the industry standard or a leading competitor when setting profit margins. Most retailers earn income by volume sales, meaning profit margins are lower on individual goods so high-volume sales must be achieved to earn positive cash flow. This is done through identifying cost drivers and the efficiency with which the cost drivers work and are managed .The type of business being retail the cost drivers associated with this would be mainly aimed at buyer power. A cost driver is one which generates cost .This driver affects cost over a period of time .all manufacturing and factory expenses can be associated with the cost drivers. A retail business deals very intricately by the supplier power not only for accounts payable but also on heavy discounts on the products that they give. This goes a long way in determining the price of the product and margin money that the retail store can get. This is again called a cost driver.
The activity of Quality assurance of products and meeting the correct specifications are another cost driver in the retail segment. Though it cannot be directly associated with the entire department but it is an activity that generates cost hence this is a very important coast aspect in a retail store .
Another important cost driver in a retail store would be associated with the department activities and functions. One store may have to heavily indulge in cost to cost sale during weekends. This is a cost that can be directly linked to the activity of revenue sales .Retail industry is behest with different kinds of cost drivers. Though not clearly associated with direct costs which directly go into the cost of production, the cost drivers nevertheless look at the allocation base of cost in the retail industry.
Capacity management in the retail industry is another cost driver. The efficiency with which the organization is able to handle its supply chain is a cost driver.
2. Variance analysis:
A retail industry definitely needs to have a variance analysis done and ready Since cost associated are typically unstable and dependant on market variations it is important that the retail firm understand the variance between pre set standards and actual performance levels .
Variance analysis setting of predetermined costs which provide a basis of comparing the actual with the standards. The variance if any between the two is critically analyzed for reconciliation. This management accounting techniques which leads to efficiency and cost effectiveness of managerial process. Budget preparations usually use the standard costing procedure. It helps in coordination of all departments to realize the efficiency in operational costs and lead to excellence in efficiencies. It is ideal tools of cost control because ideally every firm would like to control cost reduce wasteful expenditure and set standards which are realizable. the periodic review of standards and actual throw light on operational efficiencies. Standard costing and variance analysis formulate price and production policies .when standards are established it becomes easy for planners to strategies their activities to meet the standards and estimates. The use of standard costing allows for basis of computation of selling price by giving relevance to selling prices. This is based on variance analysis which is a very important tool of control measures in an organization it is the process of computing and isolating the cause of variance between standards and actual by computing individual variances in costs and determining the cost of such variances.
A retail house has to prepare variance report because every item that appears in a variance analysis appears in the operating expenses list. Cost of goods solids a perfect example. A direct expense which forms part of variable cost also appears. All this are part of operating budgets and hence is referred to as a line item in a financial report.
Variance report deals with not only items in the cost profit volume analysis otherwise known as fixed and variable cost. It also reports variances in the form of mark ups and defective goods. It also shows the mark up on profits. Hence it is a line item reporting. Variance report is also known as the income statement which is prepared on a monthly basis. This also shows the operating expenses and revenue out of these items this is the basic financial statement and hence it is called a variance report because it concisely reports items of expenses and sales.