Our Explanation of Inventory and Cost of Goods Sold will take your understanding to a new level. You will see how the income statement and balance sheet amounts are affected by the various inventory systems and cost flow...
Our Explanation of Inventory and Cost of Goods Sold will take your understanding to a new level. You will see how the income statement and balance sheet amounts are affected by the various inventory systems and cost flow...
Our Explanation of Depreciation emphasizes what the depreciation amounts on the income statement and balance sheet represent. Learn why depreciation is an estimated expense that does not assist in determining the current...
How much of the contribution margin is profit on units sold in excess of the break-even point? After the break-even point is reached, the entire contribution margin on the next units sold will be profit…provided the...
What is elastic demand? Definition of Elastic Demand Elastic demand is the situation in which demand for a product or service is sensitive to price changes. Elastic demand is a major concern for a manufacturer that...
What is disinvestment? In business, disinvestment means to sell off certain assets such as a manufacturing plant, a division or subsidiary, or product line. Disinvestment is sometimes described as the opposite of capital...
What are the limitations of the payback period? Definition of Payback Period The payback period is a common (but not the best) tool for screening a company’s potential investments. It uses the potential investment’s...
Why not use Sales in the Inventory Turnover Ratio? The short answer is: Because Inventory is at cost. Inventory is not on the company’s books at selling prices. The Inventory Turnover Ratio is Cost of Goods Sold...
What is a learning curve? Definition of Learning Curve A common learning curve shows that the cumulative average time to complete a manual task (in which learning is involved) will decrease 20% whenever the cumulative...
What is a variable cost? Definition of Variable Cost A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with the change in volume...
What is benchmarking? Benchmarking is a process for improving some activity within an organization. We will illustrate benchmarking with the following example. Company Q has identified one of its activities that needs...
What are accounting ratios? Definition of Accounting Ratios Accounting ratios, which are also known as financial ratios, are one part of financial statement analysis. Accounting ratios will often relate one financial...
What are pro forma financial statements? Definition of Pro Forma Financial Statement A pro forma financial statement is one based on certain assumptions and projections (as opposed to the typical financial statement...
Is depreciation an operating expense? Depreciation Could Be Either an Operating Expense or a Non-operating Expense Depreciation is an operating expense if the asset being depreciated is used in an organization’s main...
What is a cost center? Definition of Cost Center A cost center is often a department within a company. The manager and employees of a cost center are responsible for its costs but are not directly responsible for...
How do you calculate the average balance in accounts receivable? The average will be more representative if you include additional balances in the computation. For example, if you compute the average balance for the year...
What are the benefits of a revenue budget? The main benefit of a revenue budget is that it requires looking into the future. The revenue budget should contain the assumptions made about the future and the details about...
How can a manufacturer determine the precise cost of its products? A manufacturer may never be able to determine the precise cost of its individual products. The reason is that most of the manufacturing costs (other than...
What is the interest coverage ratio? Definition of Interest Coverage Ratio The interest coverage ratio is a financial ratio used as an indicator of a company’s ability to pay the interest on its debt. (The required...
What is the dividend payout ratio? The dividend payout ratio, or simply the payout ratio, is the percentage of a corporation’s earnings that is paid out in the form of cash dividends. The calculation of the dividend...
In standard costing, how is the purchase price variance reclassified to arrive at actual cost? Definition of Purchase Price Variance In standard costing, the purchase price variance is the difference between the actual...
What is the average collection period? Definition of Average Collection Period The average collection period is the average number of days between 1) the dates that credit sales were made, and 2) the dates that the money...
What is the difference between residual value, salvage value, and scrap value? The terms residual value, salvage value, and scrap value are often used when referring to the estimated value that is expected at the end of...
What is the coefficient of correlation? Definition of Coefficient of Correlation In simple linear regression analysis, the coefficient of correlation (or correlation coefficient) is a statistic which indicates an...
What is a budget? A budget is a financial plan for future activities. The budgets used in business often include a sales or revenues budget detailed by products or services, production budgets, budgets for each...
What is transfer pricing? Definition of Transfer Pricing Transfer pricing involves setting a price that will be used when one responsibility center of a company sells goods or services to another responsibility center of...
What is the dividend yield? The dividend yield is the annual cash dividend per share of common stock divided by the market price of a share of the common stock. Usually, fast growing corporations have a low dividend...
What increases a break-even point? Definition of Break-even Point The break-even point is the volume of sales in units or in dollars that is equal to a company’s total expenses (including the cost of goods sold). In...
Why are average balance sheet amounts used in calculating the turnover ratios? In the calculation of a turnover ratio, the numerator is an amount from an annual income statement, while the denominator is a balance sheet...
What is ROI? Definition of ROI ROI is the acronym for return on investment. Traditionally, ROI related 1) the income statement profit to the 2) the balance sheet investment. A drawback of ROI is that the accounting...
What is the meaning of base year? In accounting, base year may refer to the year in which a U.S. business had adopted the LIFO cost flow assumption for valuing its inventory and its cost of goods sold. Under the...
How do I compute the units of production method of depreciation? Definition of Units of Production Depreciation The units of production method of depreciation (which is also referred to as the units of activity method)...
Why does the fixed cost per unit change? Definition of Fixed Cost per Unit Fixed costs such as rent, salaries, depreciation, etc. generally do not change in total within a reasonable range of volume or activity. On the...
What is theoretical capacity? Theoretical capacity is the level of a manufacturer’s production that would be attained if all of its equipment and operations performed continuously at their optimum efficiency....
What is a rolling budget? Definition of Rolling Budget A rolling budget often refers to a company’s operating budget which presents the future monthly budgets for the next 12 months. A rolling budget is also known as a...
What is decentralization? Definition of Decentralization Decentralization refers to a company’s top management delegating authority to subunits or segments of the company such as a company consisting of a consumer...
What is a BOM? Definition of BOM BOM is the acronym for bill of materials. A BOM is a listing of the quantities of each of the materials used to manufacture a product. Industrial manufacturers are likely to have an...
Why would the cost behavior change outside of the relevant range of activity? Cost behavior often changes outside of the relevant range of activity due to a change in the fixed costs. When volume increases to a certain...
What is managerial accounting? Definition of Managerial Accounting Managerial accounting is also known as management accounting and it includes many of the topics that are included in cost accounting. Some of the...
What is setup cost? Definition of Setup Cost In manufacturing, setup cost is the cost incurred to get equipment ready to process a different batch of goods. Hence, setup cost is regarded as a batch-level cost in activity...
In accounting, what is meant by relevant costs? Definition of Relevant Costs Relevant costs are future costs that will differ between two or more alternative actions. Expressed another way, relevant costs are the costs...
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