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What is a Variable Cost?

When budgeting for companies, some expenses are fixed overhead and some are variable, which depend on the amount of work being done. The direct cost of materials and labor are a good example of variable costs that will fluctuate with production levels. There may be an equation that the company can use to reliably predict these variable costs, but they are not fixed costs. From an accounting perspective, of course, these costs would be in separate sections. Fixed costs include warehousing, depreciation, insurances, rent, taxes, salaries, and so forth. These can be put into the budget before anything else happens or any orders have been taken for the year. The variable costs must be taken into account on the fly. Continue reading...

What is Contribution Margin?

Contribution margin measures how efficiently a company can produce a good relative to its variable cost. Goods with high contribution margins are the most profitable. The contribution margin can be helpful in deciding what goods can go on sale and for how much, and it allows management to decipher how to improve efficiency in production while keeping variable costs low. Additionally, if there is a bottleneck in the supply chain for an input that is used to produce two different products, management could use contribution margin to decide which product takes takes priority. Continue reading...

What is the Contribution Margin Ratio?

The contribution margin ratio is a financial metric that presents the profit (less variable expenses) as a percentage of net sales. It helps businesses understand the profitability of individual products or the entire business and can be used to make informed decisions about pricing, production, and profitability. However, the contribution margin ratio has limitations and should be considered in conjunction with other financial and non-financial factors when making business decisions. Continue reading...

What is a No-Cost Mortgage?

No-Cost Mortgages waive the initial closing costs by making a repayment structure for those costs into the interest payments on a mortgage loan. Closing costs can range from 2%-5% of the total cost of the home, and include attorney fees, underwriting fees, application fees, and so on. These costs are deferred and are paid in the form of additional interest on the loan. Closing costs are separate from down-payments of equity, and are a miscellaneous hodgepodge of a wide range of fees associated with closing a mortgage deal. These costs are sometimes covered by the seller, but most often they are paid by the buyer. Continue reading...

What is Cost of Debt?

The cost of debt is a calculation that determines the actual cost of a company’s debt financing. Since interest payments are generally tax deductible, the cost of debt may not be as simple as just adding up all of the interest paid on a loan. It would have to be adjusted for the tax savings, such that it is total interest paid less the tax savings. Continue reading...

What is Adjusted Cost Basis?

Adjusted Cost Basis (ABC) is the value of an item for tax purposes, adjusted for depreciation and expenditures. Sometimes abbreviated ABC, adjusted cost basis is the valuation of an item for tax purposes; that is, if it is to be bought or sold, what gains or losses would be assigned to it? Some business assets are depreciated on a set schedule, such as equipment. For equipment sold or taken as part of an acquisition a few years after it was purchased, the depreciation factor would reduce the value of the item for tax purposes by perhaps as much as 20% per year. If a company spent significant amounts of money improving a facility, the cost basis of the facility would go up by that amount. Continue reading...

What is Cost of Capital?

The Cost of Capital is the hurdle over which a business must get to generate positive cash flow. It is what it will cost companies to get capital from investors. Companies sometimes use debts or equities to finance their business operations. The service paid on debt and the operating expenses are lines over which the revenue must get to be saved as retained earnings or distributed as dividends. The yield expected by investors on debt is the cost of capital for the company taking on those loans. Continue reading...

What is Abatement Cost?

Environmental regulations or lawsuits occasionally force companies to comply by taking measures or acquiring technologies to abate their environmental impact, and the overhead of such projects is called Abatement Cost. Increasingly over the last 20 years or so more countries and states have begun imposing laws on companies to reduce their carbon emissions, noise pollution, and various other environmental impacts. The costs of enacting measures or technologies to help them comply with such regulations is known as abatement cost. Continue reading...

What Does Opportunity Cost Mean?

Opportunity cost is a fundamental concept in economics and decision-making. It refers to the potential loss of choosing one option over another and helps individuals and organizations make informed decisions by considering the potential benefits and costs of each option. Opportunity cost also plays a significant role in macroeconomics, trade, and determining the price of goods and services. Understanding opportunity cost is essential for making trade-offs, allocating resources, and achieving long-term success. Continue reading...

What is dollar cost averaging?

Dollar cost averaging (DCA) is a method of hedging against the risk of investing a lump sum at high market prices. With DCA, the investor deploys money at set intervals, hoping to get the best average price per share. If you use the same amount of money to buy shares at set intervals, you will acquire more shares when the market is down, and fewer shares when the market is up, so theoretically you would have acquired more of the advantageously-priced shares overall and will be in a better position in the long run. Continue reading...

What is Universal Life Insurance?

Universal Life Insurance is a permanent cash value insurance that has a term-insurance component and a savings component as well. The savings component is invested in a tax-deferred account, designed to create a cash build-up that can increase the death benefit or to be used at the discretion of the policy-owner. The cash grows inside the policy tax-deferred, and if money is taken out as a loan, it avoids taxation as income. Continue reading...

What is Lifetime Cost?

Lifetime cost is the total amount of money that a good will cost a consumer over the entire course of ownership. This included related, add-on costs such as maintenance, fuel, insurance and so on. These costs can dwarf the actual purchase price of the item. Lifetime cost is also known as total cost of ownership (TCO), and it is a budgetary way to look at the expenses that go along with the purchase of an item. Continue reading...

What is coefficient of variation?

A coefficient of Variation is a statistical measure of expected return relative to the amount of risk assumed. It’s also known as “relative standard deviation,” which makes sense since that implies that your expected risk is adjusted based on the expected return. You can easily calculate the Coefficient of Variation by dividing the standard deviation of the security by its expected return. Continue reading...

What is standard deviation?

Standard Deviation is a measurement of how far from the average (mean) the majority of a data set lies. Standard Deviation is a measure of variability, and it is on a different scale for each data set being measured; there is no “standard” standard deviation. It is possible to normalize it for comparison to other data sets using measurements like r-squared and the sharpe ratio. The number arrived at when computing standard deviation is going to reveal the distance, in terms of one of the quantifiable variables being observed, from the average, in either a positive or negative direction, within which 68% of the data set falls. Continue reading...

What does hypothesis testing mean?

A theory about what will happen and why is a hypothesis, and to prove the hypothesis has some relevancy it will have to be compared to the probability of getting those results by pure chance. A hypothesis is a testable prediction of results that should be observed due to the effects of an independent variable. Such predictions must be tested against the probability of the resulting observations happening due to complete chance instead of the influence of the independent variable. Continue reading...

What are the Different Types of Annuities?

There are fixed annuities, fixed/indexed annuities, variable annuities, hybrid annuities, income annuities, period income annuities, and possibly more. Insurance companies, and the insurance subsidiary wings of investment companies, have had many years to develop strategies and marketing ploys that help clients accumulate, protect, and distribute assets within various kinds of annuities. Variable annuities allow the annuitant to participate in the market through mutual funds — or, more accurately, “separate accounts” that mimic mutual funds. Continue reading...

What is the Cost of Goods Sold?

The Cost of Goods Sold, or COGS, represents the overhead associated with the materials and labor, which were needed to produce the goods sold during a given period. The COGS calculation is only concerned with the production costs of a good, and does not take distribution and sales force costs into account. It will always include the direct materials cost and direct labor cost for each item, but indirect overhead associated with production, such facility costs, are distributed between Inventory and COGS, according to Generally Accepted Accounting Practices (GAAP). Continue reading...

What does correlation mean?

Financial traders use correlation to describe the movement of securities – how and when they move – relative to each other during a given time period. These relationships lend themselves well to pairs trading, where traders have developed an understanding of correlations and their behavior that allow them to confidently exploit slight changes to minimize risk and maximize profitable transactions. Continue reading...

What are the Basics of Annuities?

Annuities are financial products/contracts generally sold by insurance companies to protect an investor’s assets against downside market risk and long life expectancies. Investors have to pay premiums/fees in order to secure the guarantees. Annuities are very important investment instruments, and can be an indispensable part of your overall investment portfolio. Keep in mind that annuities are very aggressively marketed, and it is very important to understand exactly how they work. Continue reading...

What is an Annuity?

Annuities are financial products developed and sold generally by insurance companies, and they are designed to protect an investor’s principle against the risks of market fluctuations and longevity (life expectancy). Annuities get their names from a series of payments which are based on an annualized payout rate. Annuities formerly just offered fixed payments for life, like a pension, and they were developed by life insurance companies who would use their mortality tables to determine the payout rates. Continue reading...