Management accounting Flashcards
Characteristics of management accounting
Internal use, future oriented, frequently and timely done, relevance is more important than reliability, no reporting standards, can be focused on individual units
Cost behaviour
Reaction of costs to changes in the volume of the activity. Costs are classified in variable, fixed, mixed
cost-volume-profit analysis
forecast the changes in income due to changes in price, volume and costs
contribution margin income statement
classifies costs according to their behaviour
Contribution margin
difference between revenues and variable costs, it is what is left to cover fixed costs and provide for income
Break even point
Minimum level of activity not to incur in a loss, at wich net income is zero and contribution margin is equal to fixed costs
Cost structure
relative proportion of fixed and variable costs
Operating leverage
%change in income/ %change in volume of activity, measures how sensitive net income is to a change in volume of activity
Indifference point
Volume of activity at which two companies with different cost structure face the same total costs
Cost assignement
Process of attributing an appropriate amount of cost to each cost object > anything for which managers need a breakdown of its component costs. Allocation process to attribute overhead manufacturing costs (indirect costs) to the products through the overhead application rate
Future value of money
the value at some future date of an investment made today, computing the amount accumulated when interest on an investment is compounded for a given number of periods. Interest rate
Compounding
calculating the interest on one period starting from the principal plus the interest already accumulated
Present value
The present value equivalent to an amount to be paid or received at some future date. Discount rate
Time value of money
Difference between the future and the present value of a sum
Annuity
Amount which will be paid or received every year for a certain number of periods. Annuity rate
Cost of capital
Interest rate that the company must pay to its long term creditors to use their funds; it is a sort of minimum required rate of return in computing the present value of future cash inflows in NPV method
Internal rate of return
Actual rate of return that will be earned by a proposed investment and has to be compared to the cost of capital. It is the rate of return that equates future cash inflows and cash outflows, for which the net present value is zero
Payback period
Number of years to recover the amount of an investment. Doesn’t consider the present value of money and what happens after the payback period
Accounting rate of return
Impact of an investment on the financial statements
Budgeting
Process of planning in financial terms the organization’s future activities and their results. divided into capital budgeting (long time frame) and operating budget (planned expenses and revenues for one year or less)
Functions of budgeting
1.guide management actions 2.compare actual and planned performance 3.plan expenses and distribute resources
Budgeting process
1.sales budget 2. production budget 3.cost of goods sold budget 3. operating expenses budget 4.budgeted income statement 4.budgeted statement of cash flows 5.budgeted balance sheet
Production budget
Number of units to be produced to meet sales target and provide sufficient ending inventory
Cash budget
Cash available to finance activities, composed by cash receipts (cash inflows) and cash payments (cash outflows)
