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Value added

Value added (VA) is one of profitability differential indicators and it shows the value that the entity has added to external inputs. Value added is obtained as a difference between revenues from sales of goods/services and costs for inputs (usually direct costs). There are two alternatives for val

Division of costs to various categories

Costs can be divided into different categories according to their drivers or behavior. The main reason for the costs breakdown is their understanding and subsequent optimization / reduction.   According to traceability to cost object (most often product or service): direct costs direc

Semi-variable costs / Mixed costs

Semi-variable costs or mixed costs are costs that have both fixed and variable components.  They are variable until certain production level, then increase in step and after that grow variably again. (58) They include for example costs with a standing (fixed) fee and a variable comp

Difference between profit and cash-flow

Profit is usually not equal to cash flow because profit is defined as the difference between income and expenses, while cash flow as the difference between receipts and expenditures. Accounting profit is the final line in the income statement, while cash flow is the final line in the statement of c

Internal rate of return (IRR)

Internal rate of return is method used for investment appraisal that calculates the rate of return that is expected to be achieved by the project. IRR is related with NPV method as it is the discount rate at which NPV is zero. if IRR > target rate (often WACC) → the investment adds value

Gross margin

Gross margin is one of profitability indicators.   It can be expressed as a difference   %   Comparisons gross margin % will vary considerably between industries, so comparing companies in different industries makes little sense it makes sense to compare with the

Classification of costs according to relationship with the level of production

According to the level of production, costs can be distinguished between: fixed costs variable costs or possibly also semi-variable or semi-fixed costs By having the costs classified between fixed and variable, it is easy to prepare flexible budgets where the costs change with the the ch

Stepped (semi-fixed) costs

Stepped costs (also known as step cost) or semi-fixed costs are fixed costs which become variable after the production reaches certain level of output. In other words, different fixed rates are valid within different production ranges. An example can be rent of production premises. If the volu

Indirect costs (overheads)

Indirect costs are costs not directly and clearly identifiable with cost object (usually product or service). Together with direct (prime) costs they form total costs of the entity. Indirect costs can be both fixed and variable, production and non-production or external and internal. They are oft

EBIT / PBIT

EBIT (PBIT) is the total profit/loss without: interest expense (i.e. cost of debt) income tax possibly also profit/loss from discontinued operations (defined in IFRS, other GAAPs may not use this concept)   EBIT usually also includes so-called Non-operating result, which is the result o

Types of budgets

According to the updates for the changed level of activity (usually sales volume): fixed flexible   According to the updates for the past/new periods: static budget rolling (continuous) budget According to the level which prepares the overall budgeted figures: Top-down budgeting

Difference between expense and expenditure

Expense is not the same term as expenditure as well as income is not the same as receipt.   Expenditures (and receipts) are associated with cash movements and as such affect the entity´s cash flow. Expenses represent consumption of inputs (material, labor etc.) in order to generate re

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