...normal accounting. Sales value of production is the value of goods produced in the year, rather than the amount sold, and is computed by adding the beginning of the year’s consumable inventory to annual sales and subtracting end- of-year consumable inventory.
Note that this method of insuring business income for manufacturers leaves the profit from sales of destroyed finished inventory uninsured. To compensate for this shortfall, a manufacturer’s selling price (or finished goods) clause should be included covering the business personal property. Also, the property insurance limits should be adjusted to value the goods at selling price, less any customary discounts and unincurred costs (packing and shipping costs, etc.).
When a manufacturer’s insurance program incorporates both sales- value of-production business income coverage and a selling- price endorsement for finished stock, the insurance company may seek to reduce the business income loss by applying a credit to the measured sales value of production loss for the “margin” attained through the payment of the selling price claim for the finished stock. This “duplication of coverage” issue occurs when a loss simultaneously affects both finished stock and the ability to manufacture, but would not come into play if only one of those components was affected in a loss.
Another variation from normal accounting methods found in business income claim calculations is the treatment of “cost of goods sold”— the deduction taken from sales to arrive at the insurable business income values. For business income values, only costs for materials, raw stock or purchased inventory, and supplies consumed in the manufacturing process are deducted. For manufacturing risks, the manufacturers and their accountants frequently include as part of the “cost of goods sold,” the labor costs incurred in converting raw materials to finished goods, for unpacking and shelving goods, etc. These significant direct labor expenses (as well as utilities, depreciation and others) should be removed by insurance consultants from “cost of goods sold” and viewed as operating expenses in determining insurable business income values. Failure to do this can result in an understatement of business income values, effectively creating coinsurance penalties for an insured.