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Distinction between economic and accounting profit

The general definition is valid for both economic and accounting profit: income - expenses But the terms differ in: what is included in the formula: economic profit: explicit (i.e. expenses in the profit and loss) and implicit costs (i.e. costs that would be sacrified if we would

Opportunity costs / Implicit costs

Opportunity cost (also called also implicit costs) is the highest possible amount that could be obtained if different alternative would have been adopted. For example rent income can be opportunity costs to using the factory premises for manufacturing. Opposite to implicit (opportunity) costs

Growth rate

Growth rate is the rate by which the considered variable (revenues, expenses, dividends, investment, GDP etc.) increase either annually or over the considered period of time. It is usually derived from past data and can be calculated by a number of methods. None of the calculation methods is correct

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

Compound annual growth rate (CAGR)

Compound annual growth rate (CAGR) is method used to calculate annual grow rate from time series. The result of CAGR is interpreted as the smoothed annualized growth rate achieved during the considered time horizon. It therefore represents the rate at which the variable would have grown if the rat

Economic profit

Economic profit: income - explicit and implicit costs   It is a concept arising from general economic theory and its purpose is to evaluate the success of the company. The difference between the economic and accounting profit is described in this article.

Division of costs to various categories

Costs can be divided into different categories according to their drivers or behavior. In general, cost classification helps understand the costs by studying their behavior and drivers with the aim of their reduction or optimization. And as in other life situations, it is much easier to influen

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

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

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