Plant accounts—definition of gross earning (gross profit) Gross earning is equal to total income (sales) minus which item?
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Atotal product cost
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Bfixed cost
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Cincome tax
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Dnone of these
Answer
Correct Answer: total product cost
Explanation
Introduction / Context:In chemical plant economics, clarity on gross earning (gross profit) is vital for pricing, cost control, and contribution analysis. Gross earning is the margin available before administrative, selling, R&D, and financing charges are considered.
Given Data / Assumptions:
- Total income refers to net sales (after returns/allowances).
- Total product cost means cost of goods sold (COGS), including direct materials, direct labor, and manufacturing overhead attached to units sold.
- Fixed costs outside manufacturing (e.g., admin) and taxes are not part of COGS.
Concept / Approach:Gross earning (gross profit) = Sales revenue − Cost of goods sold. It measures how efficiently production converts inputs into saleable output. It precedes operating profit, which further subtracts selling, general, and administrative expenses.
Step-by-Step Solution:
Write identity: Gross earning = Sales − COGS.Map COGS to “total product cost” in the options.Exclude non-manufacturing fixed costs and income tax; these affect operating and net profit, not gross earning.Select “total product cost” as the subtractand.Verification / Alternative check:Standard income statement structure: Sales → COGS = Gross profit; Gross profit → Operating expenses = Operating profit; then interest and taxes to net profit.
Why Other Options Are Wrong:
- Fixed cost: may include admin/overheads not in COGS; not the definition of gross earning.
- Income tax: applied far below gross profit line.
- None of these: incorrect because “total product cost” is correct.
Common Pitfalls:Confusing plant fixed costs included in manufacturing overhead (part of COGS) with corporate fixed costs (SG&A). Ensure consistent cost classification.
Final Answer:total product cost