Accounting Summary
Chapter X-X
Timo Verkade
,Session 1
- Profit
- Opportunity cost
- Cost behavior
- Contribution margin
- Break-even analysis
Chapter 1
Profit
Profit = the economic value generated by an activity (Revenue – Expenses)
- Organizations that consistently generate losses destroy value and turn away investors,
suppliers, lenders and employees
- Have to do this in an ethical way
Opportunity cost
Opportunity cost = the economic value of the best forgone alternative. Can look at the cash flow that
each of the alternatives can generate.
,Cost behavior
Fixed costs = costs that do not change with changes in the level of activity
Variable costs = costs that change with the level of activity
- Semi variable costs/mixed costs = mix in between (energy bill with fixed start amount)
- Relevant range = costs are variable and fixed over a certain range (1 internet server/more)
Discretionary costs = costs that do not change with production of sales volume but management can
decide to reduce it.
Committed costs = hard to change (monthly payments, long term lease)
Contribution margin
Contribution margin = the difference between revenues and variable costs.
- Total contribution indicates the amount of money that a company generated before having
to pay the fixed costs.
Operating leverage = total fixed costs / total costs (shows you the relationship between fixed and
variable)
Break-even analysis
Break-even = the minimum amount of units sold in order to make a 0$ profit.
- Break-even point = fixed costs / contribution margin per unit
- You can do a sensitivity analysis or what if analysis (changing values in equation)
, Session 2
- Indifference point
- Costs, assets and expenses
- Depreciation
- Cost systems
- Death spiral
Chapter 2
Indifference point
The indifference point is the level of volume at which total costs, and hence profits, are the same
under both cost structures. This is the indifference point. It does not matter which of the 2
alternatives you choose at this point, as the results are indifferent/exactly the same. There could be
no indifference point in the curve. Break-even point compares total sales and total cost of a product.
➢ Helps managers choose between alternative cost structures (buy/lease machine, hire new
workers).
➢ Breakeven point compares 2 alternatives (doing nothing (0 profits) or selling just enough to
have 0 profits).
The concept of costs, assets and expenses
Cost = the value of a resource (value of time of an employee, value of raw materials or of equipment)
Expenses (a cost) = something you are paying for that has been fully used during a specific period and
don’t have future value (time and effort of employees, salary).
Assets (a cost) = resources that are not fully consumed in a period (are used over several periods).
This is why it is profit = revenues – expenses (and not costs), because profits reflect the resources
generated during a specific period (revenues) – the resources consumed during the same period (the
expenses).
Chapter X-X
Timo Verkade
,Session 1
- Profit
- Opportunity cost
- Cost behavior
- Contribution margin
- Break-even analysis
Chapter 1
Profit
Profit = the economic value generated by an activity (Revenue – Expenses)
- Organizations that consistently generate losses destroy value and turn away investors,
suppliers, lenders and employees
- Have to do this in an ethical way
Opportunity cost
Opportunity cost = the economic value of the best forgone alternative. Can look at the cash flow that
each of the alternatives can generate.
,Cost behavior
Fixed costs = costs that do not change with changes in the level of activity
Variable costs = costs that change with the level of activity
- Semi variable costs/mixed costs = mix in between (energy bill with fixed start amount)
- Relevant range = costs are variable and fixed over a certain range (1 internet server/more)
Discretionary costs = costs that do not change with production of sales volume but management can
decide to reduce it.
Committed costs = hard to change (monthly payments, long term lease)
Contribution margin
Contribution margin = the difference between revenues and variable costs.
- Total contribution indicates the amount of money that a company generated before having
to pay the fixed costs.
Operating leverage = total fixed costs / total costs (shows you the relationship between fixed and
variable)
Break-even analysis
Break-even = the minimum amount of units sold in order to make a 0$ profit.
- Break-even point = fixed costs / contribution margin per unit
- You can do a sensitivity analysis or what if analysis (changing values in equation)
, Session 2
- Indifference point
- Costs, assets and expenses
- Depreciation
- Cost systems
- Death spiral
Chapter 2
Indifference point
The indifference point is the level of volume at which total costs, and hence profits, are the same
under both cost structures. This is the indifference point. It does not matter which of the 2
alternatives you choose at this point, as the results are indifferent/exactly the same. There could be
no indifference point in the curve. Break-even point compares total sales and total cost of a product.
➢ Helps managers choose between alternative cost structures (buy/lease machine, hire new
workers).
➢ Breakeven point compares 2 alternatives (doing nothing (0 profits) or selling just enough to
have 0 profits).
The concept of costs, assets and expenses
Cost = the value of a resource (value of time of an employee, value of raw materials or of equipment)
Expenses (a cost) = something you are paying for that has been fully used during a specific period and
don’t have future value (time and effort of employees, salary).
Assets (a cost) = resources that are not fully consumed in a period (are used over several periods).
This is why it is profit = revenues – expenses (and not costs), because profits reflect the resources
generated during a specific period (revenues) – the resources consumed during the same period (the
expenses).
