Two classifications of one activity
IAS 1 establishes general presentation requirements. The official IFRS 18 overview describes new requirements for subtotals and grouping; the standard is mandatory for annual periods beginning on or after 1 January 2027, with early application permitted. Sources: **curr-stat-ias1**, About; **curr-stat-ifrs18**, About. As of 15 October 2026, it is not valid to claim that all statements are already prepared under IFRS 18.
Function is not cost behaviour
A cost-of-sales line does not mean that every component is strictly proportional to volume. It can contain costs with different behaviour. Administrative expense need not be entirely fixed either. Operating-leverage analysis needs a separate volume-dependence model based on data and assumptions, not a mechanical relabelling of statement lines.
A fictional manufacturer sells 100 units at a price of 10. Variable cost is 6 per unit and fixed period cost is 250. Revenue is 1,000, variable cost is 600, contribution to fixed costs is 400 and model operating result is 150. Taxes, interest and inventory changes are excluded.
What happens when volume falls
If volume falls to 80 units with price and costs unchanged, revenue becomes 800 and result becomes 70. Revenue falls by 20%, while profit falls by 53.3333%. The different movement comes from fixed burden. This is a conditional relationship, not a forecast for every manufacturing company.
Break-even volume in the model is 250 / (10 − 6) = 62.5 units. Actual sales of whole products require additional practical constraints, but the fractional result shows that fixed cost must be covered by each unit’s contribution. With a heterogeneous product mix, the division requires a sales-mix assumption and cannot be transferred automatically to the whole company.
Why gross margin does not describe the whole economics
Two companies can assign similar expenses to different functions and therefore show different gross margins. Before comparing, identify the composition of cost of sales, logistics, rent and compensation. If an expense is moved below gross profit, a higher gross margin does not by itself mean greater total efficiency. Review the final result and the reclassification bridge.
A common mistake is to treat higher profit after cutting research or maintenance as a durable improvement. The cut may raise current result while its effect on future operating capacity remains open. Another mistake is to treat every fixed cost as unchanged at every volume: capacity expansion, inflation and contract exit can change it in steps.
A workable order of analysis
List expenses by function, then separately break them down by nature. Mark overlaps before adding amounts. For a demand scenario, set a range in which the variable/fixed assumption is reasonable. If data are insufficient, use several scenarios rather than one “precise” operating leverage.
This guide does not establish a mandatory classification for a particular line and does not replace financial reporting with a management model. Use [income statement](/guides/income-statement/) and [peer comparison](/guides/peer-comparison/) for context.
Separate resource-price change from quantity change
Higher staff expense can arise from more employees, higher pay, changed functions or a new department. The same total growth rate does not identify the cause. Likewise, higher material cost per product can reflect purchase price, physical consumption or product-mix change. Look for natural measures when disclosed rather than describing all growth as “inefficiency.”
For a fixed-cost scenario, set a capacity limit. Within spare capacity, an additional sale may have one effect; after a new shift or site is needed, the structure changes. Linear analysis should not continue indefinitely. State the range in which it illustrates the question and the conditions requiring a rebuilt model.
When volume falls, some conditionally fixed costs can be removed only after a delay or additional payments. Immediate proportional reduction of every expense is usually too favourable in a stress model. Preserve the sequence of decisions and show which actions are confirmed and which are merely theoretically available. That connects operating-leverage analysis to the actual organisation.