Articles , Page 17
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...
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)...
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...
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
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
Avoidable costs
Avoidable costs are costs that can be avoided if the activity (mostly production) is discontinued. Opposite to avoidable costs are unavoidable costs.
Cost object
Cost object is an item (object) to which costs are separately measured. Cost object can be a cost center, cost unit, department, process, activity etc.
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
Classification of costs by their source
Costs can be divided based on where they arise into: External (primary) costs arise from the external sources, e.g. cost of raw material, power, wages and salaries. Internal (secondary) costs arise from internal sources, i.e. from the activities performed within the entity. They may consist of a
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
Unavoidable costs
Unavoidable costs are costs that cannot be avoided if the activity (mostly production) is discontinued. Certain type of unavoidable costs are shut-down costs. Opposite to unavoidable costs are avoidable costs.
Cost unit
Cost unit is a type of cost object representing a quantity or unit of product or service, for which costs are ascertained. Different cost units may be applicable in different situations – it depends on the nature of products and production process. Cost unit is not the same as unit cost. Un