Articles , Page 12
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...
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...
Indirect production expenses
Indirect production expenses are costs that are part of indirect production costs (production overheads) and are included neither in material or labor production overheads. As being part of overheads, they are NOT directly and clearly identifiable with cost object (usually product or service).
Selling indirect costs (Selling overheads)
Selling indirect costs (selling overheads) are costs that are incurred in order to attract and retain customers. Together with administrative and distribution overheads they form non-production indirect costs (non-production overheads). Selling overheads can include for example: rent, depreciati
Conversion costs
Conversion costs are costs necessary for the conversion of raw materials into the finished goods. They are the sum of: direct labor costs direct expenses production indirect costs (production overheads) Direct material costs are thus excluded.
Methods used to split semi-variable costs into fixed and variable components
Graphical method Past data concerning production volume (x-axis) and their corresponding level of costs (y-axis) are plotted onto the chart. Cost function will be visible after linking these points. If the points are fragmented, the costs and volume of production are not correlate
Types of costs used in decision-making
According to cost controllability: Controllable costs / Relevant costs Uncontrollable costs / Irrelevant costs – specific type of uncontrollable costs are sunk costs According to cost irreversibility: Avoidable costs Unavoidable costs – specific type of unavoidable cost
Uncontrollable costs / Irrelevant costs
Uncontrollable costs (also known as irrelevant costs) are costs that cannot be influenced by certain decision. These are usually costs where is the entity obliged to pay fixed costs based on the contract - for example rent or telephone charges. It does not make any sense to consider these costs du
Non-production indirect costs (Non-production overheads)
Non-production indirect costs (also known as non-production overheads) are indirect costs not incurred during manufacturing. Examples of non-production overheads: rent, depreciation, power or insurance of administrative and shop buildings, salaries of administrative staff and sales represent
Administrative indirect costs (Administrative overheads)
Administrative indirect costs (administrative overheads) are costs that are incurred during management, planning and controlling of the entity´s operations. Together with selling and distribution overheads they form non-production indirect costs (non-production overheads). Administrativ
Classification of costs by function
By function can costs be divided into PRODUCTION and NON-PRODUCTION. Production costs are incurred during product production. They are opposite to non-production costs which include: Administrative costs Selling costs Distribution costs Research and development costs Finance costs
Classification of costs by measurement basis
Historical cost Standard cost Estimated cost – cost estimated prior to the production without any connection to actual costs; therefore, estimated cost is less precise than standard cost
Controllable costs / Relevant costs
Controllable costs (also known as relevant costs) are costs that can be influenced by certain decisions / actions. These are the costs to be considered during decision-making between different alternatives. Opposite to controllable costs are uncontrollable (irrelevant) costs.
Sunk costs
Sunk costs are type of irrelevant costs. They are usually fixed costs incurred before the production starts (e.g. research and development, feasibility study, initial training etc.). As such, they are driven by past decisions and shall not be considered when deciding between continuing with the pro