Page 329 - Fire Insurance Ebook IC 57

The Insurance Times

'Output' basis - Advantages

n When one or more standard products are manufactured where
each unit of production can be said to earn a regular proportion of
gross profit.

n Where there is efficient cost accounting system to determine the
overall cost per unit of production.

n Factory is working at a constant rate of production, sales show a
definite seasonal tendency or are liable to irregular fluctuations.

n Where there is appreciable time lag between production and sales,
there can be interruption of production without any immediate or
corresponding reduction in turnover.

'Difference' basis of specification

n Gross Profit has been defined as net trading profit plus specified
insured standing charges. This is known as 'additions basis'

n Gross profit may be arrived at on the 'difference' basis.
n Under this specification, Gross Profit is the amount by which the

sum of the Turnover and the amount of the Closing Stock exceeds
the sum of the amount of the Opening Stock and the amount of
the Specified Working Expenses
n By eliminating all directly variable expenses out of the total
turnover, the insured gross profit is ascertained. The figure thus
arrived at will be the same as when net trading profit is added to
specified standing charges.
n The difference basis is a simpler method and has several
advantages. Since there is no need to list out specified standing
charges the chance of any of the standing charge being

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