Articles , Page 20
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...
Costing methods according to the cost types included
Costing methods differ also in the cost types that will be included in the value of inventory (costs of goods sold) and which shall be booked directly to the statement of profit and loss as period costs. Cost accounting methods include: Full costing or full production costing methods, e
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
By product
By-products are secondary products arising from common production together with so called main product. By-product does are not as important as the main products and are usually much cheaper. Example of by-product: lanolin obtained from processing wool or pectin obtained from processing fruits &n
Target costing
Target costing is a costing method used to calculate product costs by deducting desired profit margin from market price of the product / service. The procedure of setting the costs is thus reversed to cost-plus pricing. Target costing is used as a means of cost reduction/optimization
External (primary) costs
External (primary) costs arise from outside the company and include for example cost of raw materials and power consumption bought externally or wages and salaries. The opposite of external costs are costs internal (secondary). More about other possible cost divisions here.
Allocation base (Absorption rate)
Allocation base (or absorption rate) is a monetary or non-monetary parameter, according to which is allocated something that cannot be attributed directly. It is often used to allocate indirect costs (overheads) to the cost object which is typically a specific product or service. Allocation b
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
Joint product
Joint products are different products of similar values and approximately the same importance manufactured together in the same production process. An example can be cogeneration unit that produces both heat and electricity. As the production or its part is common, joint (common) costs a
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
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
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.
Degressive costs
Degressive (under-proportionate) costs are costs that increase more slowly when the production level increase. They are most often related to variable costs which can be linear (proportionate), progressive or degressive. If they are degressive and production increases, unit costs decrease. Cost degr