All terms Flashcards
absorption costing
Stock costing method in which all
variable manufacturing costs and all fxed manufacturing
costs are included as inventoriable costs
account analysis method
Approach to cost estimation
that classifes cost accounts in the ledger as variable,
fxed or mixed with respect to the cost driver. Typically,
qualitative rather than quantitative analysis is used in
making these classifcation decisions.
activity-based accounting
Examination of activities
across the entire chain of value-adding organisational
processes underlying causes (drivers) of cost and proft.
activity-based budgeting
Approach to budgeting that
focuses on the costs of activities necessary to produce and
sell products and services.
activity-based costing (ABC)
Approach to costing that
focuses on activities as the fundamental cost objects. It uses
the cost of these activities as the basis for assigning costs to
other cost objects such as products, services or customers.
actual costing
A costing method that traces direct costs
to a cost object by using the actual direct cost rate(s) times
the actual quantity of the direct cost input(s) and allocates
indirect costs based on the actual indirect cost rate(s) times
the actual quantity of the cost allocation base
actual costs
Costs incurred (historical costs), as distinguished from budgeted or forecast costs
appraisal costs
Costs incurred in detecting which of the
individual units of products do not conform to
specifcation
attention directing
Management accountant’s function
that involves making visible both opportunities and
problems on which managers need to focus
autonomy
The degree of freedom to make decisions.
backflush accounting
A cost accounting system which
focuses on the output of the organisation and then works
Glossary
backwards to allocate costs between cost of goods sold and
stock.
backflush costing
Costing system that delays recording
changes in the status of a product being produced until
good fnished units appear; it then uses budgeted or
standard costs to work backwards to flush out
manufacturing costs for the units produced. Also called
delayed costing, endpoint costing or post-deduct costing.
balanced scorecard
A measurement and management
system that views a business unit’s performance from four
perspectives: fnancial, customer, internal business process,
and learning and growth.
batch-level costs
The costs of resources sacrifced on
activities that are related to a group of units of products or
services rather than to each individual unit of product or
service.
belief systems
Levers of control that articulate the
mission, purpose, norms of behaviours and core values
of a company; intended to inspire managers and other
employees to do their best.
benchmark
Point of reference from which comparisons
may be made
benchmarking
The continuous process of measuring
products, services or activities against the best levels of
performance.
book value
The original cost minus accumulated
depreciation of an asset.
bottleneck
An operation where the work required
approaches or exceeds the available capacity
boundary systems
Quantity of output where total
revenues and total costs are equal; that is where the
operating proft is zero.
budget
The quantitative expression of a plan of action
and an aid to the coordination and implementation of the
plan.
bundled product
A package of two or more products
or services, sold for a single price, where the individual
components of the bundle may be sold as separate items,
each with its stand-alone price.
business function costs
The sum of all the costs in a
particular business function.
business governance
The performance dimension of an
enterprise.
by-product
Product from a joint process that has a low sales value compared with the sales value of the main or joint product(s).
capitalised costs
Costs that are frst recorded as an asset
(capitalised) when they are incurred
carrying costs
Costs that arise when a business holds
stocks of goods for sale
cash budget
Schedule of expected cash receipts and
disbursements.
cause-and-effect diagram
Diagram that identifes the
potential causes of failures or defects. Four major categories
of potential causes of failure are identifed human factors,
methods and design factors, machine-related factors and
materials and components factors. Also called a fshbone
diagram.
Chartered Institute of Management Accountants
CIMA
The principal professional management
accounting body in the UK, founded in 1919 as the
Institute of Cost and Works Accountants. Today, in
terms of membership, it is the third largest professional
accounting body in the UK
collusive pricing
Companies in an industry conspire in
their pricing and output decisions to achieve a price above
the competitive price
combined variance analysis
Approach to overhead
variance analysis that combines variable-cost and fxed-cost
variances
common cost
The cost of operating a facility, operation,
activity area or like cost object that is shared by two or
more users.
complete reciprocated cost
The actual cost incurred by
the service department plus a part of the costs of the other
support departments that provide services to it; it is always
larger than the actual cost. Also called artifcial cost of the
service department.
composite product unit
A hypothetical unit of product with
weights related to the individual products of the company.
constant
The component of total costs that, within the
relevant range, does not vary with changes in the level of
the cost driver. Also called intercept
constant gross-margin percentage NRV method
Joint
cost allocation method that allocates joint costs in such a
way that the overall gross-margin percentage is identical for
all the individual products.
continuous improvement budgeted cost
Budgeted cost
that is successively reduced over succeeding time periods.
contribution income statement
Income statement that
groups line items by cost behaviour pattern to highlight the
contribution margin.
contribution margin
Revenues minus all costs of the
output (a product or service) that vary with respect to the
number of output units.
contribution margin percentage
Total contribution
margin divided by revenues.
control
Covers both the action that implements the
planning decision and the performance evaluation of the
personnel and operations.
controllability
The degree of influence that a specifc
manager has over costs, revenues or other items in
question
controllable cost
Any cost that is primarily subject to
the influence of a given manager of a given responsibility
centre for a given time span.
conversion costs
All manufacturing costs other than
direct materials costs.
cost accounting
Measures and reports fnancial and
other information related to the organisation’s acquisition
or consumption of resources. It provides information for
both management accounting and fnancial accounting.
cost accumulation
The collection of cost data in some
organised way through an accounting system
cost allocation
The assigning of indirect costs to the
chosen cost object.
cost-allocation base
A factor that is the common
denominator for systematically linking an indirect cost or
group of indirect costs to a cost object.
cost assignment
General term that encompasses both
tracing accumulated costs to a cost object and allocating
accumulated costs to a cost object
cost–beneft approach
Primary criterion for choosing
among alternative accounting systems, which is how each
system achieves organisational goals in relation to the cost
of those systems.
cost centre
A responsibility centre in which a manager is
accountable for costs only
cost driver
Any factor that affects total costs. That is, a
change in the cost driver will cause a change in the level of
the total cost of a related cost object
cost estimation
The measurement of past cost
relationships
cost hierarchy
Categorisation of costs into different cost
pools on the basis of different classes of cost drivers or
different degrees of difculty in determining cause-andeffect (or benefts received) relationships.
cost incurrence
Occurs when a resource is sacrifced or
used up
cost leadership
An organisation’s ability to achieve lower
costs relative to competitors through productivity and
efciency improvements, elimination of waste and tight
cost control.
cost management
Actions by managers undertaken to
satisfy customers while continuously reducing and
controlling costs.
cost object
Anything for which a separate measurement
of costs is desired
cost-plus contract
Contract in which reimbursement is
based on actual allowable cost plus a fxed fee
cost pool
A grouping of individual cost items.
cost smoothing
A costing approach that uses broad
averages to uniformly assign (spread or smooth out) the
cost of resources to cost objects (such as products, services
or customers) when the individual products, services or
customers in fact use those resources in a non-uniform way.
cost tracing
The assigning of direct costs to the chosen
cost object.
cost–volume–proft (CVP) analysis
Examines the
behaviour of total revenues, total costs and operating proft
as changes occur in the output level, selling price, variable
costs or fxed costs; a single revenue driver and a single cost
driver are used in this analysis.
current cost
Asset measure based on the cost of
purchasing an asset today identical to the one currently
held. It is the cost of purchasing the services provided by
that asset if an identical asset cannot currently be
purchased
customer proftability analysis
Examines how individual
customers, or groupings of customers, differ in their
proftability
denominator level
Quantity of the allocation base used
to allocate fxed overhead costs to a cost object. Also called a production denominator level or a production
denominator volume.
differential approach
Approach to decision making and
capital budgeting that analyses only those future cash
outflows and inflows that differ among alternatives.
direct allocation method
Method of support cost
allocation that ignores any service rendered by one
support department to another; it allocates each support
department’s total costs directly to the operating
departments. Also called direct method
direct costs of a cost object
Costs that are related to the
particular cost object and that can be traced to it in an
economically feasible way
direct manufacturing labour costs
Compensation of all
manufacturing labour that is considered to be specifcally
identifed with the cost object (say, units fnished or in
process) and that can be traced to the cost object in an
economically feasible way
direct material costs
The acquisition costs of all
materials that eventually become part of the cost object
(say, units fnished or in progress) and that can be traced to
that cost object in an economically feasible way
direct materials stock
Direct materials in stock and
awaiting use in the manufacturing process.
discounted cash flow (DCF)
Capital budgeting method
that measures the cash inflows and outflows of a project as
if they occurred at a single point in time so that they can be
compared in an appropriate way.
discretionary costs
Arise from periodic (usually yearly)
decisions regarding the maximum outlay to be incurred.
They are not tied to a clear cause-and-effect relationship
between inputs and outputs.
dual pricing
Approach to transfer pricing using two
separate transfer-pricing methods to price each
interdivision transaction
dual-rate cost-allocation method
Allocation method
that frst classifes costs in one cost pool into two sub-pools
(typically into a variable-cost sub-pool and a fxed-cost
sub-pool). Each sub-pool has a different allocation rate or a
different allocation base
economic order quantity (EOQ)
Decision model
that calculates the optimal quantity of stock to order.
Simplest model incorporates only ordering costs and
carrying costs
economic value added (EVA®)
After-tax operating proft
minus the (after-tax) weighted average cost of capital
multiplied by total assets minus current liabilities.
efficiency variance
The difference between the actual
quantity of input used (such as metres of materials) and
the budgeted quantity of input that should have been used,
multiplied by the budgeted price. Also called inputefciency variance or usage variance
engineered costs
Costs that result specifcally from a
clear cause-and-effect relationship between costs and
outputs
equivalent units
Measure of the output in terms of the
physical quantities of each of the inputs (factors of
production) that have been consumed when producing
the units. It is the physical quantities of inputs necessary
to produce output of one fully complete unit
estimated net realisable value (NRV) method
Joint cost
allocation method that allocates joint costs on the basis of
the relative estimated net realisable value (expected fnal
sales value in the ordinary course of business minus the expected separable costs of production and marketing of
the total production of the period).
expected value
Weighted average of the outcomes of a
decision with the probability of each outcome serving as
the weight. Also called expected monetary value.
extended normal costing
A costing method that traces
direct costs to a cost object by using the budgeted directcost rate(s) times the actual quantity of the direct-cost
input and allocates indirect costs based on the budgeted
indirect-cost rate(s) times the actual quantity of the costallocation base. Also called budgeted costing
external failure costs
Costs incurred when a nonconforming product is detected after it is shipped to
customers
favourable variance
Variance that increases operating
proft relative to the budgeted amount. Denoted F.
financial accounting
Focuses on external reporting that
is guided by generally accepted accounting principles.
frst-in, frst-out (FIFO) process-costing
method
Method of process costing that assigns the cost
of the earliest equivalent units available (starting with the
equivalent units in opening work-in-progress stock) to units
completed and transferred out, and the cost of the most
recent equivalent units worked on during the period to
closing work-in-progress stock.
flexible budget
A budget that is developed using
budgeted revenues or cost amounts; when variances are computed, the budgeted amounts are adjusted (flexed) to
recognise the actual level of output and the actual
quantities of the revenue and cost drivers.
flexible-budget variance
Difference between the actual
result and the flexible budget amount for the actual output
achieved
homogeneous cost pool
Cost pool in which all the
activities whose costs are included in the pool have the
same or a similar cause-and-effect relationship or beneftsreceived relationship between the cost allocator and the
costs of the activity.
high–low method
Method used to estimate a cost
function that entails using only the highest and lowest
observed values of the cost driver within the relevant
range.
hybrid-costing system
Blends of characteristics from
both job-costing systems and process-costing systems.
incremental cost-allocation method
Cost-allocation
method requiring that one user be viewed as the primary
party and the second user be viewed as the incremental
party.
incremental costs
Additional costs to obtain an
additional quantity over and above existing or planned
quantities of a cost object. Also called outlay costs or
out-of-pocket costs.
indirect costs of a cost object
Costs that are related to
the particular cost object but cannot be traced to it in an
economically feasible way.
indirect manufacturing costs
All manufacturing costs
considered to be part of the cost object (say, units fnished
or in progress) but that cannot be individually traced to
that cost object in an economically feasible way. Also called
manufacturing overhead costs and factory overhead costs.
insourcing
Process of producing goods or providing
services within the frm rather than purchasing those same
goods or services from outside vendors.
intermediate product
Product transferred from one
subunit to another subunit of the organisation. This
product may be processed further and sold to an external
customer.
internal failure costs
Costs incurred when a nonconforming product is detected before it is shipped to
customers
investment centre
A responsibility centre in which a
manager is accountable for investments, revenues and
costs.
job-costing system
Costing system in which the cost of a
product or service is obtained by assigning costs to a
distinct unit, batch or lot of a product or service.
joint cost
Cost of a single process that yields multiple
products simultaneously.
joint products
Products from a joint process that have
relatively high sales value and are not separately identifable
as individual products until the split-off point.
kaizen budgeting
Budgetary approach that explicitly
incorporates continuous improvement during the budget
period into the resultant budget numbers.
key success factors
Factors that directly affect customer
satisfaction such as cost, quality, time and innovative
products and services.
locked-in costs
Costs that have not yet been incurred but
that will be incurred in the future on the basis of decisions
that have already been made. Also called designed-in costs.
main product
When a single process yielding two or
more products yields only one product with a relatively
high sales value, that product is termed a main product
management accounting
The application of accounting
and fnancial management principles to create, protect,
preserve and increase value so as to deliver that value to
stakeholders of for-proft and not-for-proft enterprises,
both public and private (see Chapter 1 for an expanded
defnition).
management by exception
The practice of
concentrating on areas that are not operating as expected
and placing less attention on areas operating as expected.
manufacturing lead time
Time from when an order is
ready to start on the production line (ready to be set up) to
when it becomes a fnished good
manufacturing overhead allocated
All manufacturing
costs that are assigned to a product (or service) using a cost
allocation base because they cannot be traced to a product
(or service) in an economically feasible way
margin of safety
Excess of budgeted revenues over the
breakeven revenues
master budget
Budget that summarises the fnancial
projections of all the organisation’s individual budgets. It
describes the fnancial plans for all value-chain functions.
mixed cost
A cost that has both fxed and variable
elements. Also called a semivariable cost.
net present-value (NPV) method
Discounted cash-flow
method that calculates the expected net monetary gain or
loss from a project by discounting all expected future cash
inflows and outflows to the present point in time, using the
required rate of return.
nominal rate of return
Rate of return required to cover
investment risk and the anticipated decline due to inflation,
in the general purchasing power of the cash that the
investment generates
non-linear cost function
Cost function in which the
graph of total costs versus a single cost driver does not
form a straight line within the relevant range
normal costing
A costing method that traces direct costs
to a cost object by using the actual direct cost rate(s) times
the actual quantity of the direct cost input and allocates
indirect costs based on the budgeted indirect cost rate(s)
times the actual quantity of the cost-allocation base.
operating leverage
The effects that fxed costs have on
changes in operating income as changes occur in units sold
and hence in contribution margin.
operation costing
Hybrid costing system applied to
batches of similar products. Each batch of products is
often a variation of a single design and proceeds through
a sequence of selected (though not necessarily the same)
activities or operations. Within each operation all product
units use identical amounts of the operation’s resources.
opportunity cost
The contribution to income that is
forgone (rejected) by not using a limited resource in its best
alternative use.
output-unit-level costs
The costs of resources sacrifced
on activities performed on each individual unit of product
or service
overallocated indirect costs
Allocated amount of
indirect costs in an accounting period is greater than the
actual (incurred) amount in that period. Also called
overapplied indirect costs and overabsorbed indirect costs
padding
The practice of underestimating budgeted
revenues (or overestimating budgeted costs) in order to
make budgeted targets more easily achievable. Also called
budgetary slack.
payback method
Capital budgeting method that
measures the time it will take to recoup, in the form of net
cash inflows, the net initial investment in a project.
perfectly competitive market
Exists when there is a
homogeneous product with equivalent buying and selling
prices and no individual buyers or sellers can affect those
prices by their own actions
physical measure method
Joint cost allocation method
that allocates joint costs on the basis of their relative
proportions at the split-off point, using a common physical measure such as weight or volume of the total production
of each product
planning
Choosing goals, predicting results under
various ways of achieving those goals and then deciding
how to attain the desired goals.
practical capacity
The denominator-level concept that
reduces theoretical capacity for unavoidable operating
interruptions such as scheduled maintenance time,
shutdowns for holidays and other days, and so on.
predatory pricing
Company deliberately prices below
its costs in an effort to drive out competitors and restrict
supply and then raises prices rather than enlarge demand
or meet competition.
price variance
The difference between actual price and
budgeted price multiplied by the actual quantity of input in
question. Also called input-price variance or rate variance
(especially when those variances are for direct-labour
categories)
process-costing system
Costing system in which the cost
of a product or service is obtained by using broad averages
to assign costs to masses of similar units.
product cost
Sum of the costs assigned to a product for a
specifc purpose
product-cost cross-subsidisation
Costing outcome
where at least one miscosted product is resulting in the
miscosting of other products in the organisation.
product-sustaining costs
The costs of resources
sacrifced on activities undertaken to support specifc
products or services.
production-volume variance
Difference between
budgeted fxed overhead and the fxed overhead allocated.
Fixed overhead is allocated based on the budgeted fxed
overhead rate times the budgeted quantity of the fxedoverhead allocation base for the actual output units
achieved. Also called denominator-level variance and
output-level overhead variance.
profit centre
A responsibility centre in which a manager
is accountable for revenues and costs.
proration
The spreading of underallocated or
overallocated overhead among closing stocks and cost of
goods sold.
reciprocal allocation method
Method of support-cost
allocation that explicitly includes the mutual services
rendered among all support departments
refned costing system
Costing system that results
in a better measure of the non-uniformity in the use of
resources by jobs, products and customers.
relevant costs
Expected future costs that differ among
alternative courses of action.
responsibility centre
A part, segment or subunit of an
organisation whose manager is accountable for a specifed
set of activities
revenue centre
A responsibility centre in which a
manager is accountable for revenues only.
revenue mix
The relative contribution of quantities of
products or services that constitutes total revenues. See
sales mix
reworked units
Unacceptable units of production that
are subsequently reworked and sold as acceptable fnished
goods.
sales-mix variance
The difference between the budgeted
amount for the actual sales mix and the budgeted amount
if the budgeted sales mix had been unchanged.
sales-quantity variance
The difference between the
budgeted amount based on actual quantities sold of all
products and the budgeted-mix and the amount in the
static budget (which is based on the budgeted quantities to
be sold of all products and the budgeted mix).
sales value at split-off method
Joint cost allocation
method that allocates joint costs on the basis of the relative
sales value at the split-off point of the total production in
the accounting period of each product
sales-volume variance
Difference between the
flexible-budget amount and the static-budget amount; unit
selling prices, unit variable costs and fxed costs are held
constant.
scorekeeping
Management accountant’s function that
involves accumulating data and reporting reliable results to
all levels of management.
scrap
Product that has a minimal (frequently zero) sales
value.
selling-price variance
Flexible-budget variance that
pertains to revenues; arises solely from differences between
the actual selling price and the budgeted selling price.
sensitivity analysis
A what-if technique that examines
how a result will change if the original predicted data are
not achieved or if an underlying assumption changes.
separable costs
Costs incurred beyond the split-off point
that are assignable to one or more individual products
single-rate cost-allocation method
Allocation method
that pools all costs in one cost pool and allocates them to
cost objects using the same rate per unit of the single
allocation base.
split-off point
Juncture in the process when one or more
products in a joint-cost setting become separately
identifable.
spoilage
Unacceptable units of production that are
discarded or sold for net disposal proceeds.
stand-alone cost-allocation method
Cost allocation
method that allocates the common cost on the basis of
each user’s percentage of the total of the individual
stand-alone costs.
standard cost
Carefully predetermined cost. Standard
costs can relate to units of inputs or units of outputs
standard costing
Costing method that traces direct costs
to a cost object by multiplying the standard price(s) or
rate(s) times the standard inputs allowed for actual outputs
achieved and allocates indirect costs on the basis of the
standard indirect rate(s) times the standard inputs allowed
for the actual outputs achieved.
static budget
Budget that is based on one level of output;
when variances are computed at the end of the period, no
adjustment is made to the budgeted amounts.
step-down allocation method
Method of support cost
allocation that allows for partial recognition of services
rendered by support departments to other support
departments. Also called step or sequential allocation
method.
stockout costs
Costs that result when a company runs
out of a particular item for which there is customer
demand. The company must act to meet that demand or
suffer the costs of not meeting it.
suboptimal decision making
Decisions in which the
beneft to one subunit is more than offset by the costs or
loss of benefts to the organisation as a whole. Also called
incongruent decision making
sunk costs
Past costs that are unavoidable because they
cannot be changed no matter what action is taken.
support department
A department that provides the
services that maintain other internal departments
(operating departments and other support departments)
in the organisation. Also called a service department
theoretical capacity
The denominator-level concept that
is based on the constant production of output at maximum
efciency.
total direct manufacturing labour mix variance
The
difference between (a) the budgeted cost for the actual
direct manufacturing labour input mix and (b) the
budgeted cost if the budgeted direct labour input mix had
been unchanged, for the actual total quantity of all direct
manufacturing labour used.
total direct manufacturing labour yield variance
The
difference between (a) the budgeted cost of direct
manufacturing labour based on actual total quantity of all
direct manufacturing labour used and (b) the flexible
budget cost of direct manufacturing labour based on the
budgeted total quantity of direct manufacturing labour
inputs for the actual output achieved, given that the
budgeted labour input mix is unchanged.
total direct materials mix variance
The difference
between (a) the budgeted cost for the actual direct materials
input mix and (b) the budgeted cost if the budgeted direct
materials input mix had been unchanged, for the actual
total quantity of all direct material inputs used.
total direct materials yield variance
The difference
between (a) the budgeted cost of direct materials based on
actual total quantity of all direct materials inputs used and
(b) the flexible-budget cost of direct materials based on the
budgeted total quantity of direct materials inputs for the
actual output achieved, given that the budgeted materials
input mix is unchanged.
transfer price
Price that one subunit (segment,
department, division, etc.) of an organisation charges for a
product or service supplied to another subunit of the same
organisation.
transferred-in costs
Costs incurred in a previous
department that are carried forward as part of the
product’s cost as it moves to a subsequent department for
processing. Also called previous department costs
underallocated indirect costs
Allocated amount of
indirect costs in an accounting period is less than the
actual (incurred) amount in that period. Also called
underapplied indirect (overhead) costs or underabsorbed
indirect costs
unfavourable variance
Variance that decreases operating
proft relative to the budgeted amount. Denoted U.
value-added cost
A cost that, if eliminated, would
reduce the value customers obtain from using the product
or service.
variable-overhead efciency variance
g.
variable-overhead efciency variance The difference
between the actual and budgeted quantity of the variableoverhead cost-allocation base allowed, for the actual output
units achieved, times the budgeted variable overhead cost
allocation rate
variable-overhead spending variance
The difference
between the actual amount of variable overhead incurred
and the budgeted amount allowed for the actual quantity
of the variable-overhead allocation base used, for the actual
output units achieved.
weighted-average process-costing method
Method of
process costing that assigns the average equivalent unit cost
of all work done to date (regardless of when it was done)
to equivalent units completed and transferred out and to
equivalent units in closing stock.
work-in-progress stock
Goods partially worked on but
not yet fully completed. Also called work in process.
