Finance and accounting lectures semester 1
Lecture 1 Prantik: Friday 11-09
Chapter 7 and 8
Year 1 -> nancial accounting
Year 2 -> managerial accounting
Financial accounting:
• objective: informing / reporting outsiders / stakeholders on what is happening in the company
• Internally used information
• Financial statements need to be made
• Standardised in what you have to do and how you have to present it -> highly regulated and in
uniform presented information.
• Mostly based on historical information.
• -> based for reporting
Management accounting:
• Objective: to make decisions regarding to certain goals and certain planning -> to use
information to make decisions, decide on goals and strategic planning.
• Not regulated; companies can make their own rules, systems and procedures.
• -> based for decision making
Cost, relevant and irrelevant cost:
Cost: A resource usually presented in monetary terms that needs to be spent / sacri ced to
achieve business goals / objectives.
Depending on context / situation, certain costs are relevant or irrelevant for decision-making.
• Example: if you want to make a decision on a new electric oven, the money you have spent on
your old oven is an irrelevant cost.
- HISTORIC costs are irrelevant costs
- OPPORTUNITY / OUTLAY costs are relevant costs
• Example opportunity costs: you are a bakery and you own a van for delivery. You paid 7000
euros last year to pay the van. A new bakery opens next door and he says I’d like to buy your van
and give you 8000 euros. Someone else comes in and says can you give the van and is prepared
to pay 8500 euros.
So, if you sell the van you get 8000/8500 euro, but you do not have to sell it. If you do not sell the
van and use it for deliveries you have an opportunity cost of 8000 euros / 8500 euros.
• Outlay costs = what do you have to spend to get something / do something
• Example: if you want a new van, how much do you have to spend? etc.
What makes a cost relevant:
1. Related to the business objective
2. Must be a future cost?
3. Varies with decision / outlay will vary -> the outcome will vary based on the cost that you
have.
Cost behaviour, xed and variable cost
Costs have certain behaviours. Many times costs vary with the volume of activity.
Variable costs = costs that vary with the volume of activity
Fixed costs = does not vary with the volume of activity
Bakery example:
Costs to operate the bakery (rent, machinery (lease)) -> xed costs
Bakery makes bread, depending on how much bread I make I have certain costs -> variable costs
* very important to understand what xed costs and variable costs are
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, For utilities xed costs and variable costs might depend on a little bit contract term you have with
the company.
Semi- xed & semi-variable costs
It might be that the cost are xed to some level of activity and then it becomes variable.
Example: if you use to 1000 unit of electricity, more than 1000 units, each unit becomes more
expensive. Based on the level of activity the cost can be di erent.
Break-even analysis, contribution, margin of safety
Break-even point:
Level of activity (in units or monetary terms) at which total cost = total sales revenue
• Total costs = xed costs + variable costs
We have to be able to nd the break-even point based on information that will be given.
Formula break-even point:
B = xed costs / (sales revenue per unit* - variable cost per unit)
* = price
Contribution / contribution per unit
Contribution per unit = sales revenue per unit - variable costs per unit
BEP (in units) = xed costs / contribution per unit
Contribution margin ratio = (contribution / sales revenue) x 100
-> when you compare two products from the same company -> used when deciding in terms of
product (margin analysis)
Product A: contribution 3 euro
Product B: contribution 4 euro
Margin of safety:
The extent to which planned volume of output or sales revenue is above the BEP
Margin of safety of 25 per cent means that my sales should be 25 per cent more than BEP at
least.
Page 2 of 12
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Lecture 1 Prantik: Friday 11-09
Chapter 7 and 8
Year 1 -> nancial accounting
Year 2 -> managerial accounting
Financial accounting:
• objective: informing / reporting outsiders / stakeholders on what is happening in the company
• Internally used information
• Financial statements need to be made
• Standardised in what you have to do and how you have to present it -> highly regulated and in
uniform presented information.
• Mostly based on historical information.
• -> based for reporting
Management accounting:
• Objective: to make decisions regarding to certain goals and certain planning -> to use
information to make decisions, decide on goals and strategic planning.
• Not regulated; companies can make their own rules, systems and procedures.
• -> based for decision making
Cost, relevant and irrelevant cost:
Cost: A resource usually presented in monetary terms that needs to be spent / sacri ced to
achieve business goals / objectives.
Depending on context / situation, certain costs are relevant or irrelevant for decision-making.
• Example: if you want to make a decision on a new electric oven, the money you have spent on
your old oven is an irrelevant cost.
- HISTORIC costs are irrelevant costs
- OPPORTUNITY / OUTLAY costs are relevant costs
• Example opportunity costs: you are a bakery and you own a van for delivery. You paid 7000
euros last year to pay the van. A new bakery opens next door and he says I’d like to buy your van
and give you 8000 euros. Someone else comes in and says can you give the van and is prepared
to pay 8500 euros.
So, if you sell the van you get 8000/8500 euro, but you do not have to sell it. If you do not sell the
van and use it for deliveries you have an opportunity cost of 8000 euros / 8500 euros.
• Outlay costs = what do you have to spend to get something / do something
• Example: if you want a new van, how much do you have to spend? etc.
What makes a cost relevant:
1. Related to the business objective
2. Must be a future cost?
3. Varies with decision / outlay will vary -> the outcome will vary based on the cost that you
have.
Cost behaviour, xed and variable cost
Costs have certain behaviours. Many times costs vary with the volume of activity.
Variable costs = costs that vary with the volume of activity
Fixed costs = does not vary with the volume of activity
Bakery example:
Costs to operate the bakery (rent, machinery (lease)) -> xed costs
Bakery makes bread, depending on how much bread I make I have certain costs -> variable costs
* very important to understand what xed costs and variable costs are
Page 1 of 12
fi fi fi fi fi
, For utilities xed costs and variable costs might depend on a little bit contract term you have with
the company.
Semi- xed & semi-variable costs
It might be that the cost are xed to some level of activity and then it becomes variable.
Example: if you use to 1000 unit of electricity, more than 1000 units, each unit becomes more
expensive. Based on the level of activity the cost can be di erent.
Break-even analysis, contribution, margin of safety
Break-even point:
Level of activity (in units or monetary terms) at which total cost = total sales revenue
• Total costs = xed costs + variable costs
We have to be able to nd the break-even point based on information that will be given.
Formula break-even point:
B = xed costs / (sales revenue per unit* - variable cost per unit)
* = price
Contribution / contribution per unit
Contribution per unit = sales revenue per unit - variable costs per unit
BEP (in units) = xed costs / contribution per unit
Contribution margin ratio = (contribution / sales revenue) x 100
-> when you compare two products from the same company -> used when deciding in terms of
product (margin analysis)
Product A: contribution 3 euro
Product B: contribution 4 euro
Margin of safety:
The extent to which planned volume of output or sales revenue is above the BEP
Margin of safety of 25 per cent means that my sales should be 25 per cent more than BEP at
least.
Page 2 of 12
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