Final Flashcards
A private, independent standard-setting body established by the accounting profession that has been delegated the authority by the SEC to establish most accounting rules and regulations for public financial reporting.
Financial Accounting Standard Board
Government agency responsible for overseeing the accounting rules to be followed by companies required to be registered with it.
Securities and Exchange Commission (SEC)
Rules and practices that accountants agree to follow in financial reports prepared for public distribution.
generally accepted accounting principles (GAAP)
The benefits attained (value added) from the process should exceed the cost of the process.
value-added principle
All costs related to obtaining or manufacturing a product intended for sale to customers; are accumulated in inventory accounts and expensed as the cost of goods sold at the point of sale.
product costs
Pricing strategy that sets the price at cost plus a markup equal to a percentage of the cost.
cost-plus pricing
Classification and accumulation of individual inputs (materials, labor, and overhead) for determining the cost of making a good or providing a service.
product costing
Costs associated with producing products that cannot be cost-effectively traced to products include indirect costs such as indirect materials, indirect labor, utilities, rent, and depreciation.
overhead
Asset account used to accumulate the product costs (direct materials, direct labor, and overhead) associated with completed products that have not yet been sold.
Finished Goods Inventory
The total cost of making products divided by the total number of products made.
average cost
Costs of raw materials used to make products that can be easily and conveniently traced to those products.
direct raw materials
Wages paid to production workers whose efforts can be easily and conveniently traced to products.
direct labor
All costs not associated with obtaining or manufacturing a product; sometimes called period costs because they are normally expensed in the period in which the economic sacrifice is incurred.
selling, general, and administrative costs (SG&A)
General, selling, and administrative costs that are expensed in the period in which the economic sacrifice is made.
period costs
Costs that cannot be easily traced to a cost object and for which the economic sacrifice to trace is not worth the informational benefits.
indirect costs
Production costs that cannot be traced directly to products.
manufacturing overhead
Process of dividing a total cost into parts and assigning the parts to relevant objects.
cost allocation
Costs incurred in the process of making products including direct materials, direct labor, and manufacturing overhead.
midstream costs
Costs incurred before the manufacturing process begins, for example, research and development costs.
upstream costs
Costs, such as delivery costs and sales commissions, are incurred after the manufacturing process is complete.
downstream costs
Asset account used to accumulate the costs of materials (such as lumber, metals, paints, chemicals) that will be used to make a company’s products.
Raw Materials Inventory
Asset account used to accumulate the product costs (direct materials, direct labor, and overhead) associated with incomplete products that have been started but are not yet completed.
work in process inventory
Internal accounting report that summarizes the manufacturing product costs for the period; its result, cost of goods sold, is reported as a single line item on the company’s income statement.
schedule of cost of goods manufactured and sold
Costs associated with acquiring and retaining inventory including cost of storage space; lost, stolen, or damaged merchandise; insurance; personnel and management costs; and interest.
inventory holding costs
The inventory flow system minimizes the amount of inventory on hand by making inventory available for customer consumption on demand, therefore eliminating the need to store inventory.
just in time (JIT)
Cost of lost opportunities such as the failure to make sales due to an insufficient supply of inventory or the wage a working student forgoes to attend class.
opportunity cost
How a cost reacts (goes up, down, or remains the same) relative to changes in some measure of activity (e.g., the behavior pattern of the cost of raw materials is to increase as the number of units of product made increases).
cost behavior
Operating condition in which a percentage change in revenue produces a proportionately larger percentage change in net income; measured by dividing the contribution margin by net income.
operating leverage
Difference between a company’s sales revenue and total variable cost; represents the amount available to cover fixed cost and thereafter to provide a profit.
contribution margin
Costs composed of a mixture of fixed and variable components.
mixed costs (semivariable costs)
Range of activity over which the definitions of fixed and variable costs are valid.
relevant range
Factor that causes changes in variable cost; is usually some measure of volume when used to define cost behavior.
activity base
Point where total revenue equals total cost; can be expressed in units or sales dollars.
break-even point
Cost-volume-profit analysis technique that uses the algebraic relationship among sales, variable costs, fixed costs, and desired net income before taxes to solve for required sales volume.
equation method
The contribution margin per unit is equal to the sales price per unit minus the variable cost per unit.
contribution margin per unit
Difference between break-even sales and budgeted sales expressed in units, dollars, or as a percentage; the amount by which actual sales can fall below budgeted sales before a loss is incurred.
margin of safety
Planning activities associated with long-range decisions such as defining the scope of the business, determining which products to develop, deciding whether to discontinue a business segment, and determining which market niche would be most profitable.
strategic planning
Financial planning activities that cover the intermediate range of time such as whether to buy or lease equipment, whether to purchase a particular investment, or whether to increase operating expenses to stimulate sales.
capital budgeting
Short-range planning activities such as the development and implementation of the master budget.
operations budgeting
Continuous budgeting activity normally covering a 12-month time span by replacing the current month’s budget at the end of each month with a new budget;
perpetual or (continuous) budgeting
Budget technique that allows subordinates to participate with upper-level managers in setting budget objectives, thereby encouraging cooperation and support in the attainment of the company’s goals.
participative budgeting
Composition of the numerous separate but interdependent departmental budgets that cover a wide range of operating and financial factors such as sales, production, manufacturing expenses, and administrative expenses.
master budget
Budgets prepared by different departments within a company that will become a part of the company’s master budget;
operating budgets
Budgeted financial statements are prepared from the information in the master budget.
pro forma financial statements
A budget that focuses on cash receipts and payments that are expected to occur in the future.
cash budget
Practice of delegating authority and responsibility for the operation of business segments.
decentralization
Point in an organization where the control over revenue or expense items is located.
responsibility center
Type of responsibility center that incurs costs but does not generate revenue.
cost center
Type of responsibility center for which both revenues and costs can be indentified.
profit center
Type of responsibility center for which revenue, expense and capital investments can be measured.
investment center
Evaluating managerial performance based only on revenue and costs under the manager’s direct control.
controllability concept
Measure of profitability based on the asset base of the firm. It is calculated as net income divided by average total assets. ROI is a product of net margin and asset turnover.
return on investment (ROI)
Component in the determination of the return on investment. Computed by dividing operating income by sales.
margin
Component in the determination of the return on investment. Computed by dividing sales by operating assets.
turnover
Situation in which managers act in their own self-interests even though the organization as a whole suffers.
suboptimization
Approach that evaluates managers on their ability to maximize the dollar value of earnings above some targeted level of earnings.
residual income
A management evaluation tool that includes financial and nonfinancial measures
balanced scorecard
