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

Absorption costing

Absorption costing is a type costing method or rather the approach to costing. It is sometimes called as full costing method as it values the product (or jobs, batches, processes etc.) by direct costs and allocated, apportioned and absorbed share of production indirect costs (production overheads)

Product´s life cycle

Product´s life cycle stages     Research and development product has not yet been launched to the market and pre-production costs such as research & development or costs of finding appropriate production premises are incurred this stage is included within introduction st

Measurement of inventories under IAS 2 Inventories

Under IAS 2 - Inventories, inventories are measured at the lower of cost and net realizable value. (5)   Measurement of costs cost of purchase: covering: purchase price import duties and irrecoverable taxes (e.g. VAT for entities not registered for VAT) transportation, hand

Production indirect costs (Production overheads)

Although production indirect costs (also known as production overheads) are costs associated with the production they are indirect which means they are NOT directly and clearly identifiable with cost object (usually product or service). Together with non-production overheads they form total indirect

Direct (prime) costs

Direct costs are costs directly and clearly identifiable with cost object (usually product or service). That means the costs DIRECTLY associated with the production process of specific product. Together with indirect costs (overheads) they form total costs of the entity.  They are sometimes cal

Marginal (variable) costing

Marginal costing is a type of costing method under which only variable costs are included to the value of the product (or job, contract, batch, process, etc.). Therefore, fixed costs are not allocated to the product and are expensed.   It is also known as variable costing method.   Th

Activity based costing (ABC)

Activity based costing (ABC) is costing method, under which all costs are allocated to company activities according to what are the drivers of the activities. Costs are then allocated to products based on product´s consumption of these activities. ABC was developed to overcome the disadvanta

Difference between direct and indirect costs, their division and accounting

According to the traceability to cost object (usually a specific type of product or service) the costs can be divided into DIRECT COSTS (PRIME COSTS) and INDIRECT COSTS (OVERHEADS). The reason for such classification is especially appropriate inventory (and possibly other assets as well) valuation.

Differences between Absorption costing, Activity Based Costing, Marginal costing and Througput costing

The basic difference between these costing approaches is what costs are assigned to the product. However, Absorption costing method and Activity Based Costing use different approach, but more about it can be found  in separate articles.   Under Throughput costing, only direct material co

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

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

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