Accounting and Economic Terms

• Study notes on key accounting and economic terms

Opportunity Costs

• Benefits that are forfeited when choosing one alternative over another.

Opportunity Set

• Represents the alternatives to the opportunity cost.

Historical Costs

• Resources expended for actions already taken.

Sunk Costs

• Past expenditures that are irrecoverable.

Fixed Costs

• Costs incurred even when there is no production.

Marginal Costs

• The cost of producing one additional unit.

Average Cost

• Cost per unit, calculated by dividing the total cost by the number of units produced.

Variable Costs

• Additional costs incurred when output is increased.

Relevant Range

• The output levels between X and Y, for which the sum of fixed and variable costs closely approximates total cost.

Strait Line Approximation

• Total Cost = Fixed Cost + (Variable Cost * Units Produced)

Step Costs

• Expenditures that are fixed within a specific range of output levels.

Mixed Costs

• Cost categories that are not purely fixed or purely variable.

Contribution Margin

• The difference between total revenue and variable costs.

Break-Even Point

• Calculated as Fixed Costs / Contribution Margin per unit.

Profit Maximizing Point of Output

• This point occurs when marginal revenue equals marginal cost.

Marginal Revenue

• Receipts from the last unit sold.

Total Revenue

• Price * Quantity Sold

Profit

• Calculated as (Price - Variable Costs) * Quantity - Fixed Costs.

Limitations of Cost-Volume Profit Analysis (CVPA)

• Price and variable costs per unit must remain constant with volume.
• It is a single-period analysis, all revenues and costs occur in the same period.
• It assumes the firm produces a single product.

Operating Income Formulas

• OI = Total Revenue - Direct Costs - Indirect Costs
• OI = Gross Profit - Operating Expenses - Depreciation - Amortization
• OI = Net Earnings + Interest Expense + Taxes

Product Cost

• Accounting costs incurred to manufacture a product; inventoried and expensed only when the product is sold.

Period Costs

• Costs expensed in the period in which they occur, including all costs incurred to sell the product.

Fixed Period Costs

• Salespeople's salaries, advertising, and marketing costs.

Variable Period Costs

• Distribution and sales commissions.

Unit Manufacturing Costs (UMC)

• The cost of a product, excluding period costs.

Direct Costs

• Items that are easily traced to a product or service.

Indirect Materials

• Materials used for maintaining and testing machines, as well as those lost during machine breakdowns.

Overhead

• Includes direct labor and indirect material costs, along with general manufacturing costs not easily traced to units produced.

Cost Behavior

• Consists of fixed costs, variable costs, mixed costs, and step costs.

Cost Volume Profit Analysis (CVPA)

• Helps determine breakeven points in units and sales, units needed to achieve income targets, and sales volume needed to achieve income targets.

Breakeven Point in Units (BEPunits)

• Fixed Costs / (Selling Price - Variable Costs per Unit) which is equivalent to Fixed Costs / Contribution Margin per Unit

Breakeven Point in Sales (BEPsales)

• Fixed Costs / (1 - % Variable Costs)