Grüning Definitions Flashcards
Accounting
- process of identifying, measuring and communicating
- economic information to permit informed judgments and decisions
- by users of information
Cost accounting
Accounting concerned with cost accumulation for inventory valuation to meet the requirements of external reporting and internal profit measurement.
Financial accounting
Accounting concerned with the provision of information to parties that are external to the organization
Management accounting
Accounting concerned with the provision of information to people within the organization to aid decision-making and improve the efficiency and effectiveness of existing operations.
Stakeholders
Various parties that have an interest in an organization. Examples include managers, shareholders and potential investors, employees, creditors and the government.
Conversion cost
The sum of direct labour and manufacturing overhead costs; it is the cost of converting raw materials into finished products.
Cost object
Any activity for which a separate measurement of costs is desired.
- “cost of something”
Direct labour costs
Labour costs that can be specifically and exclusively identified with a particular cost object.
Direct material costs
Material costs that can be specifically and exclusively identified with a particular cost object.
Fixed costs
- Costs that remain constant for a specified time period and which are not affected by the volume of activity.
- decreases when looked at on a per unit basis
Indirect costs
- Costs that cannot be identified specifically and exclusively with a given cost object, also known as overheads.
- sometimes direct cost are treated as indirect cost for economic reason
- indirect costs are assigned to cost object
Marginal cost
The additional cost of one extra unit of output.
Overheads
Costs that cannot be identified specifically and exclusively with a given cost object, also known as indirect costs.
Period costs
Costs that are not included in the inventory valuation of goods and which are treated as expenses for the period in which they are incurred.
Prime cost
The sum of all direct manufacturing costs.
Product costs
- Costs that are identified with goods purchased or produced for resale and which are attached to products and included in the inventory valuation of goods.
- “inventories”
Responsibility accounting
Accounting that involves tracing costs and revenues to responsibility centres.
Responsibilty Centre
A unit or department within an organization for whose performance a manager is held responsible.
Semi-fixed costs
Costs that remain fixed within specified activity levels for a given amount of time but which eventually increase or decrease by a constant amount at critical activity levels; also known as step-fixed costs
Step-fixed costs
Costs that remain fixed within specified activity levels for a given amount of time but which eventually increase or decrease by a constant amount at critical activity levels; also known as semi-fixed costs.
Sunk costs
Costs that have been incurred by a decision made in the past and that cannot be changed by any decision that will be made in the future.
⇒irrelevant for decision-making
Cost
monetary measure of resources sacrificed/forgone to achieve a specific objective
Cost Collection System
- accumulate cost by classifying into categories
2. assign costs to cost objects
Variable Costs
- vary in direct proportion with activity
- is constant when seen on a per unit basis
Semi Variable / Mixed Costs
- include both a fixed and a variable component (e.g. telephone charges)
- Classification depends on time horizon -> In the short term some costs are fixed, but in the long term all costs are variable
Relevant Costs
change because of a decision
Irrelevant Costs
do not change because of a decision -> relevance is relative to the decision
Avoidable Costs
- can be saved by not adopting a given alternative ⇒ is relevant costs
Unavoidable Costs
cannot be saved by not adopting a given alternative ⇒ is irrelevant costs
Opportunity Costs
measures the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action be given up
⇒ scarce resources
⇒ relevant for decision-making
Incremental Costs
- difference of costs between alternatives
Absorption costing system
A costing system that allocates all manufacturing costs, including fixed manufacturing costs, to products and values unsold stocks at their total cost of manufacture
- full costing
- trace all manufacturing costs to products
- all non-manufacturing overhead is period cost
Activity
The aggregation of different tasks, events or units of work that cause the consumption of resources.
Activity-based costing (ABC)
A system of cost allocation that aims to use mainly cause-andeffect cost allocations by assigning costs to activities.
Allocation base
The basis used to allocate costs to cost objects.
Arbitrary allocation
The allocation of costs using a cost base that is not a significant determinant of cost.
Blanket overhead rate
An overhead rate that assigns indirect costs to cost objects using a single overhead rate for the whole organization, also known as plant-wide rate.
Budgeted overhead rate
An overhead rate based on estimated annual expenditure on overheads and levels of activity.
Cost allocation
The process of assigning costs to cost objects where a direct measure of the resources consumed by these cost objects does not exist.
Direct costing system
A costing system that assigns only direct manufacturing costs, not fixed manufacturing costs, to products or services. Also known as variable costing system or marginal costing system.
Traditional costing systems
Widely used costing systems that tend to use arbitrary allocations to assign indirect costs to cost objects.
Under- or over-recovery of overheads
The difference between the overheads that are allocated to products or services during a period and the actual overheads that are incurred.
Average cost
A method of valuing stock that has been purchased at different prices that values all items at the average cost.
First in, first out (FIFO)
A method of valuing stock that has been purchased at different prices that assumes that the first item received was the first to be issued.
Last in, first out (LIFO)
A method of valuing stock that has been purchased at different prices that assumes that the last item received was the first to be issued.
Abnormal gain
A gain that occurs when the level of a normal loss is less than expected.
Abnormal losses
Losses that are not inherent to the production process and which are not expected to occur under efficient operating conditions, also known as controllable losses.
Normal losses
Unavoidable losses that are inherent to the production process and can be expected to occur in efficient operating conditions, also known as uncontrollable losses.
Full costing system
A costing system that allocates all manufacturing costs, including fixed manufacturing costs, to products and values unsold stocks at their total cost of manufacture.
Marginal costing system
A costing system that assigns only variable manufacturing costs, not fixed manufacturing costs, to products and includes them in the inventory valuation, also known as variable costing system or direct costing system
Normal activity
A measure of capacity required to satisfy average customer demand over a longer term period after taking into account seasonal and cyclical fluctuations.
Variable costing system
A costing system that assigns only variable manufacturing costs, not fixed manufacturing costs, to products and includes them in the inventory valuation, also known as marginal costing system or direct costing system.
Plant-Wide Overhead Rate
only justified if all products consume departmental overheads in approximately the same proportions
Cost-Centre Overhead Rates
- required if products do not consume departmental overhead the same proportion
- for each cost-centre a specific overhead rate is used to allocate this cost centre’s overhead
Job Costing
Direct costs and factory overhead assigned to individual units of output because each unit consumes different quantities of resources
Process Costing
Direct costs and factory overhead are not assigned to individual units of output but processes because each unit is identical. Instead, average unit costs are computed
Break-even point
The level of output at which costs are balanced by sales revenue and neither a profit nor a loss will occur.
Contribution margin
The margin calculated by deducting variable expenses from sales revenue.
Relevant range
The output range at which an organization expects to be operating with a shortterm planning horizon.
Outsourcing
The process of obtaining goods or services from outside suppliers instead of producing the same goods or providing the same services within the organization.
Committed resources
Resources that have to be acquired in discrete amounts in advance of usage, where the supply cannot be continually adjusted in the short run to match exactly the usage of resources.
Cost driver
The basis used to allocate costs to cost objects in an ABC system. It is also a measure that exerts a major influence on the cost of a particular activity.
Cost of unused capacity
The difference between the cost of resources supplied and the cost of resources used.
Flexible resources
Types of resource whose supply can be continually adjusted to match exactly the usage of resources.
Time-driven ABC
A simplified approach for operating ABC in large organizations where employees are surveyed to estimate the percentage of time they expect to spend on activities and expenses are assigned to the activities based on the average percentages derived from the survey. The quantities of work for activities are obtained in order to derive the cost driver rates, which are then used to assign to resources the customers or products that use the activities.
Return on investment
A method of appraising capital investments where the average annual profits from a project are divided into the average investment cost, also known as the accounting rate of return and return on capital employed.
Zero-based budgeting
An approach to budgeting in which projected expenditure for existing activities starts from base zero rather than last year’s budget, forcing managers to justify all budget expenditure, also known as priority-based budgeting.
Cost centres
Responsibility centres whose managers are normally accountable for only those costs that are under their control, also known as expense centres.
Variance analysis
The analysis of factors that cause the actual results to differ from predetermined budgeted targets.
Budgeted costs
Expected costs for an entire activity or operation.
Fixed overhead expenditure variance
The difference between the budgeted fixed overheads and the actual fixed overhead spending.
Labour efficiency variance
The difference between the standard labour hours for actual production and the actual labour hours worked during the period multiplied by the standard wage rate per hour.
Material price variance
The difference between the standard price and the actual price per unit of materials multiplied by the quantity of materials purchased.
Material usage variance
The difference between the standard quantity required for actual production and the actual quantity used multiplied by the standard material price.
Sales margin price variance
The difference between the actual selling price and the standard selling price multiplied by the actual sales volume.
Sales margin volume variance
The difference between the actual sales volume and the budgeted volume multiplied by the standard contribution margin
Standard costs
Target costs that are predetermined and should be incurred under efficient operating conditions.
Standard hours
The number of hours a skilled worker should take working under efficient conditions to complete a given job.
Total fixed overhead variance
The difference between the standard fixed overhead charged to production and the actual fixed overhead incurred.
Total labour variance
The difference between the standard labour cost for the actual production and the actual labour cost.
Total material variance
The difference between the standard material cost for the actual production and the actual cost.
Total sales margin variance
The difference between actual sales revenue less the standard variable cost of sales and the budgeted contribution.
Total variable overhead variance
The difference between the standard variable overheads charged to production and the actual variable overheads incurred.
Variable overhead efficiency variance
The difference between the standard hours of output and the actual hours of input for the period multiplied by the standard variable overhead rate.
Variable overhead expenditure variance
The difference between the budgeted flexed variable overheads for the actual direct labour hours of input and the actual variable overhead costs incurred.
Volume capacity variance
The difference between the actual hours of input and the budgeted hours of input for the period, multiplied by the standard fixed overhead rate.
Volume efficiency variance
The difference between the standard hours of output and the actual hours
Balanced scorecard
A strategic management tool that integrates financial and non-financial measures of performance in a single concise report, with the aim of incorporating performance measurement within the strategic management process.
Investment centre
Responsibility centres whose managers are responsible for both sales revenues and costs and also have responsibility and authority to make capital investment decisions.
Profit centre
A division or part of an organization in which the manager does not control the investment and is responsible only for the profits obtained from operating the assets assigned by corporate headquarters.
