Articles
Disadvantages of accounting profit
Profit as a basic profitability indicator used by companies has the following drawbacks: profit does not equal net inflow of money, costs do not equal expenditures and incomes do not equal receipts profit includes the results of operations that are ad-hoc and will not be repeated in the future various methodologies particularly in the ar...
Net present value (NPV)
Net present value (NPV) is a method for investment appraisal that is based on discounted cash-flow methodology. It shows the amount by which shareholder´s wealth would be increased. It is calculated as the total of present values of future relevant cash-flows over the project life. It comes out from relevant future cash-flows (free cash-flow)...
Liquidity indicators
Liquidity is the entity´s ability to convert its assets into cash for the purpose to settle its obligations, ideally with the lowest possible transaction costs. (14) Indicators of liquidity Liquidity indicators show the extent to which the current assets of the company in various forms cover its short-term obligations. Thus, the num...
Standard costing
Standard costing is a cost accounting measurement basis that predicts unit costs and production quantities based on predetermined standards before the production even begins and as such it is an alternative method to historical cost accounting. It is suitable for production, which is standardized and mass or repetitive. Standard costing serves as...
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
Rolling budget / Continuous budget
Rolling (continuous) budget is budget, which is continuously updated by: deducting the figures for periods that have passed adding the “missing” future period figures For example if the original budget covered the period January – December 20x1 and January 20x1
Indirect labor costs (Labor overheads)
Indirect labor costs (labor overheads) are together with indirect material costs and possibly indirect expenses part of indirect (overhead) production costs. As being their part, they are NOT directly and clearly identifiable with cost object (usually product or service). Indirect labor costs incl
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
Incremental budgeting
Incremental budgeting is the traditional approach that comes out either from the actual results or previous budget and adjusts it for the expected changes. It is the opposite approach to zero-based budgeting. In general, incremental budgeting does not take into account the changes in assum
Distribution indirect costs (Distribution overheads)
Distribution indirect costs (distribution overheads) costs that are incurred to be able to deliver the product to customer. Together with administrative and selling overheads they form non-production indirect costs (non-production overheads). Distribution overheads include for example: wages of
Operating ratio
Operating ratio is one of profitability indicators. Its formula can be easily derived from the profit margin formula (Return on sales). It expresses how much cost is incurred for each unit of sales. Calculation formula Comparison it is particularly suitable for compari
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