What is the Marginal Cost of Production? The Marginal Cost of Production is the cost to provide one additional unit of a product or service. It is a fundamental principle that is used to derive economically optimal decisions and an important aspect of managerial accounting and financial analysis. It can be calculated as: If a company’s…
What is Calendarization? The process of standardizing the reporting time periods of financial statements is called calendarization. To make comparable companies “equal,” the financial data of each company must be standardized so that there is a fair basis for comparison. For example, if you are examining a set of companies with fiscal years ending March 31,…
What is Repo 105? Repo 105 is an accounting gimmick that was used within Lehman Brothers to classify short-term loans as a sale. It is a form of repurchase agreement that allows companies to borrow the excess funds of other companies for a short duration in exchange for collateral. The borrower promises to pay back the…
What is a Contingent Liability? A contingent liability is a potential liability that may or may not occur, depending on the result of an uncertain future event. The relevance of a contingent liability depends on the probability of the contingency becoming an actual liability, its timing, and the accuracy with which the amount associated with…
What is Cost Behavior Analysis? Cost behavior analysis refers to management’s attempt to understand how operating costs change in relation to a change in an organization’s level of activity. These costs may include direct materials, direct labor, and overhead costs that are incurred from developing a product. Management typically performs cost behavior analysis through mathematical…
What is Activity-Based Costing? Activity-based costing is a more specific way of allocating overhead costs based on “activities” that actually contribute to overhead costs. In job-order costing and variance analysis, overhead costs are applied based on a specific cost driver such as labor hours or machine hours. An activity is an event, task, or unit…
Accounting Forums – Overview There are several accounting forums on the internet that offer both students and professionals from different locations the opportunity to connect and reach out to one another. Businesses are also taking advantage of the growing number of online communities to find new customers and engage them. Online accounting forums are now the…
What is an Auditor’s Report? An independent Auditor’s Report is an official opinion issued by an external or internal auditor as to the quality and accuracy of the financial statements prepared by a company. The report is a primary source of communication between the auditor and users of financial statements. The users include equity holders,…
What is Zero-Based Budgeting (ZBB)? Zero-based budgeting (ZBB) is a budgeting technique that allocates funding based on efficiency and necessity rather than budget history. Management starts from scratch and develops a budget that only includes operations and expenses essential to running the business; there are no expenses that are automatically added to the budget. All…
What is the Revenue Recognition Principle? The revenue recognition principle dictates the process and timing by which revenue is recorded and recognized as an item in a company’s financial statements. Theoretically, there are multiple points in time at which revenue could be recognized by companies. Generally speaking, the earlier revenue is recognized, it is said…
