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MANAGEMENT ADVISORY SERVICES > MANAGEMENT ACCOUNTING VOCABULARY AND THEORY > Flashcards

MANAGEMENT ACCOUNTING VOCABULARY AND THEORY Flashcards

1
Q

What is meant by relevant range?

A

Relevant range is the range of activity within which the assumptions about variable and fixed costs (or cost behaviour) are valid.

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2
Q

What does opportunity cost mean?

A

Opportunity cost is the potential benefit that is given up when one alternative is selected over another.

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3
Q

What does sunk cost mean?

A

Sunk cost is a cost that has already been incurred and cannot be changed by any decision made now or in the future.

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4
Q

What are quality costs?

A

Quality costs, also called costs of quality, are costs incurred to prevent, detect, and deal with defects.

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5
Q

What are prevention costs?

A

Prevention costs are costs spent on activities whose purpose is to reduce or eliminate the number of defects.

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6
Q

What are appraisal costs?

A

Appraisal costs, more commonly known as inspection costs, are incurred to identify defective products before the products are shipped to customers.

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7
Q

What are quality circles?

A

Quality circles consist of small groups of employees that meet on a regular basis to discuss ways to improve quality.

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8
Q

What is statistical process control?

A

Statistical process control is a technique that is used to detect whether a process is in or out of control.

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9
Q

What are internal failure costs?

A

Internal failure costs are costs that result from identifying defective products before they are shipped to customers. These costs include scraps, rejects, reworking, and downtime costs caused by quality problems.

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10
Q

What are external failure costs?

A

External failure costs are costs that result when a defective product is delivered to a customer, which could be warranty repairs, replacements, product recalls, liability from legal action, and lost sales arising from bad reputation.

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11
Q

What does cost structure mean?

A

Cost structure is the relative proportion of each type of cost in an organization.

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12
Q

What is an activity base?

A

An activity base, also called cost driver, is a measure of whatever causes the incurrence of variable cost.

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13
Q

What are step-variable costs?

A

Step-variable costs are costs of resources obtained in chunks and that increases or decreases only in response to fairly wide changes in activity.

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14
Q

What are committed fixed costs?

A

Committed fixed costs are LONG-TERM fixed costs that cannot be significantly reduced for short periods of time without making fundamental changes, such as depreciation on buildings and insurance.

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15
Q

What are discretionary fixed costs?

A

Discretionary SHORT-TERM fixed costs are fixed costs that usually arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research.

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16
Q

What is a mixed cost?

A

A mixed cost, also known as SEMIVARIABLE COSTS, contains both variable and fixed elements. It can be broken down to its variable and fixed costs by using:

  1. HIGH-LOW METHOD
  2. LEAST SQUARES REGRESSION METHOD
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17
Q

What is the engineering approach when it comes to cost analysis?

A

Engineering approach involves a detailed analysis of what cost behavior should be based on evaluation of production methods to be used, such as materials specification, power consumption, equipment usage, and so on.

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18
Q

What is R-squared in least squares regression analysis?

A

It is a measure of GOODNESS OF FIT in least squares regression analysis. It is the percentage of the variation in the dependent variable that is explained by variation in the independent variable. A HIGHER R-SQUARED IS BETTER.

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19
Q

What is a cost-volume-profit analysis?

A

It is an analysis of relationships between an organization’s revenues, costs, sales, and profits.

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20
Q

What is incremental analysis?

A

Incremental analysis is an analytical approach that focuses on the cost and revenues that change as a result of a decision.

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21
Q

What is target profit analysis?

A

Target profit analysis is estimating what sales volume is needed to achieve a specific target profit.

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22
Q

What is a break-even point?

A

It is the level of sales at which profit is zero.

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23
Q

What is the degree of operating leverage?

A

It is a measure at a given level of sales, of how a percentage change in sales will affect profits, and is computed by dividing contribution margin by net operating income.

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24
Q

What is operating leverage?

A

Operating leverage is a measure of how sensitive net operating income is to a given percentage change in sales.

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25
Q

What is absorption costing?

A

Absorption costing, or full cost method, treats all manufacturing costs as product costs regardless of whether they are variable or fixed. Its product cost include:

  1. Direct Materials
  2. Direct Labor
  3. Variable Mfg Overhead
  4. Fixed Mfg Overhead
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26
Q

What is an allocation base?

A

An allocation base is a measure that is used to assign overhead costs to products, most notably direct labor hours and machine hours.

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27
Q

What is a predetermined overhead rate?

A

A predetermined overhead rate is a rate computed by dividing the manufacturing overhead cost by the total amount of allocation base, and is used to allocate the overhead.

28
Q

What is a cost driver?

A

A cost driver is a factor, such as machine or labor hours, that “drives” or causes overhead costs.

29
Q

What are the three methods of allocating costs done by service departments?

A
  1. Direct Method
  2. Step-Down Method
  3. Reciprocal Method
30
Q

What is activity based costing?

A

ABC is a costing method based on activities that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore fixed as well as variable costs.

31
Q

What is process costing?

A

Process costing is used by organizations that produce many units of a single product for long periods. It is a method of assigning costs to units of production in companies producing large quantities of homogeneous products.

32
Q

What is job costing?

A

Job costing is used in situations where many different products are produced each period.

33
Q

What is a budget?

A

A budget is a detailed plan for acquiring and using resources over a specific time period.

34
Q

Differentiate top-down and bottom-up budgeting.

A

Top-down budgeting - budget is prepared by top-management and is imposed on the lower levels of organization.

Bottom-up budgeting - also known as participative or self-imposed budget, it is prepared with full cooperation and participation of managers at all levels.

35
Q

What is a master budget?

A

A master budget consists of a number of separate but interdependent budgets that formally outlay the company’s sales, production and financial goals.

36
Q

What is the starting point when making a master budget?

A

In making a master budget, a sales budget must first be made.

37
Q

What is spending variance?

A

Spending or rate or price variance is the difference between how much a cost should have been given the actual level of activity and the actual amount of cost incurred.

38
Q

What is activity variance?

A

Activity or efficiency or quantity variance is the difference between the cost in the static planning budget and the flexible budget.

39
Q

What is fixed cost budget variance?

A

It is the difference between the actual fixed overhead and the budgeted fixed overhead.

40
Q

What is fixed volume variance?

A

It is the difference between the budgeted fixed overhead and the fixed overhead applied.

41
Q

What is a decentralized organization?

A

Decentralized organization is an organization in which decision-making authority is spread throughout the organization rather than being confined to a few top executives.

42
Q

What are responsibility centers? What are its types?

A

Responsibility centers are used for any part of an organization whose manager has control over and is accountable for cost, profit or investments. The three types of responsibility centers are:

  1. Cost center
  2. Profit center
  3. Investment center
43
Q

What are cost centers?

A

Cost centers have control over costs, but not over revenue or the use of investment funds.

44
Q

What are profit centers?

A

Profit centers have control over both costs and revenues, but not investment funds.

45
Q

What are investment centers?

A

Investment centers have control over cost, revenue, and investments in operating assets.

46
Q

What is a segment?

A

A segment is a part or activity of an organization about which managers would like cost, revenue, or profit data.

47
Q

How is segment margin computed?

A

Sales XXX
Variable Expenses
CoGS (xxx)
Other variable expenses (xxx)
Contribution margin XXX
Segment/Traceable fixed costs (xxx)
Segment margin XXX

The total of all segment’s segment margin are then added together, and then the sum is reduced by the fixed costs that are not traceable to get the net operating income.

48
Q

What is delivery cycle time?

A

Delivery cycle time is the amount of time from when a customer order is received to when the completed order is shipped.

It is computed by adding wait time to throughput time.

49
Q

What is Throughput time?

A

Throughput or MANUFACTURING CYCLE TIME is the amount of time required to turn raw materials into completed products.

Manufacturing cycle time is THE SUM OF:

  1. Process time
  2. Inspection time
  3. Move time
  4. Queue time
50
Q

What is Manufacturing Cycle Efficiency? How is it computed?

A

Manufacturing cycle efficiency measures the proportion of production time spent on value-added activities. It is computed by dividing the value adding time by the throughput manufacturing cycle time.

Value added time is the amount of time PROCESSING.

Non-value adding time is the amount of time spent on WAITING, INSPECTING, MOVING, AND QUEUING.

51
Q

What are balanced scorecards?

A

Balanced scorecards consist of integrated sets of performance measures that are derived from and support the company’s strategies.

52
Q

What is a transfer price?

A

Transfer price is the price charged when one segment of a company provides goods or services to another segment of the same company.

53
Q

What is the range of acceptable transfer prices?

A

It is the range of transfer prices within which the profits of both divisions participating in a transfer would increase.

54
Q

Differentiate the jobs of CFOs, Treasurers, and Controllers.

A

CONTROLLER: financial controller is a senior-level executive who acts as the head of accounting, and oversees the preparation of financial reports, such as balance sheets and income statements. In addition to preparing reports, the controller’s responsibilities may also include compliance audits, monitoring internal controls, participating in the budgeting process and analyzing financial data to varying degrees.

CFO: A chief financial officer (CFO) is the senior executive responsible for managing the financial actions of a company. The CFO’s duties include tracking cash flow and financial planning as well as analyzing the company’s financial strengths and weaknesses and proposing corrective actions.

TREASURER: Treasurers obtain loans and other credit from outside sources, maintain relationships with banks, raise equity capital, invest company funds and communicate with shareholders. In general, they manage the company’s cash and ensure that the company meets the financial goals expressed in the budget.

To simplify the major difference, a CFO will often be involved in fundraising and finance strategy, whereas a controller’s responsibilities usually stop at ensuring accurate reporting.

CONTROLLER TREASURER
Control Planning Capital Provision
Reporting and Interpreting Investor Relations
Evaluating and Consulting Short-Term Financing
Administrating Tax Banking and Custody
Government Reporting Credits and Collections
Asset Protection Investments
Appraising the Economy Insurance

55
Q

What is target costing?

A

Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product. If it cannot manufacture a product at these planned levels, then it cancels the design project entirely.

56
Q

What Is Total Quality Management (TQM)?

A

Total quality management is a managerial accounting concept where an organization strives to produce higher quality products with few defects being shipped to customers. Total quality management is a lean business practice often associated with continuous improvement and just-in-time inventory and just-in-time manufacturing.

57
Q

What is Just-in-time production system?

A

The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules. Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately.

58
Q

What is continuous improvement?

A

Continuous improvement is an organized approach to identifying opportunities for improvement that can help an organization meet its goals for increasing profits, reducing costs, and accelerating innovation. The approach is also used to enhance the quality of a product or service, and to improve safety. Continuous improvement is often part of a specific methodology such as Lean, TPS, Kaizen, Kanban, or Six Sigma, though this is not always the case.

59
Q

What is business process reengineering?

A

Business process reengineering is the act of recreating a core business process with the goal of improving product output, quality, or reducing costs.

Typically, it involves the analysis of company workflows, finding processes that are sub-par or inefficient, and figuring out ways to get rid of them or change them.

60
Q

What is Kaizen costing?

A

Kaizen costing is the process of continual cost reduction that occurs after a product design has been completed and is now in production. Cost reduction techniques can include working with suppliers to reduce the costs in their processes, or implementing less costly re-designs of the product, or reducing waste costs.

61
Q

What is Product lifecycle costing?

A

Product lifecycle costing is the accumulation of a product’s costs over its whole life, from inception to abandonment. The typical stages of a product’s whole life are:

Introduction
Growth
Maturity
Decline.

62
Q

What is a Gantt Chart?

A

A Gantt chart, or harmonogram, is a type of bar chart that illustrates a project schedule. This chart lists the tasks to be performed on the vertical axis, and time intervals on the horizontal axis. The width of the horizontal bars in the graph shows the duration of each activity. Gantt charts illustrate the start and finish dates of the terminal elements and summary elements of a project.

63
Q

What is a PERT Chart?

A

The program (or project) evaluation and review technique (PERT) is a statistical tool used in project management, which was designed to analyze and represent the tasks involved in completing a given project.

64
Q

What is the Theory of Constraints?

A

ToC can help management reduce cycle time. ToC indicates that the flow of goods through a production process cannot be at a rate faster than the slowest constraint in the process.

65
Q

What is a constraint?

A

A constraint is anything that confines or limits the ability of a person or machine to perform a project or function.

66
Q

What is Economic Order Quantity?

A

EOQ represents the least costly number of units to order. It indicates the optimal balance between ordering and carrying costs by mathematically equating total ordering costs to total carrying costs.

See cost accounting book p 175

67
Q

What is an order point?

A

An order point reflects the level of inventory that triggers the placement of an order for additional units. Determination of order point is based on:

  1. Usage
  2. Lead time
  3. Safety stock

USAGE refers to the quantity used or sold each day
LEAD TIME refers to the time it takes from placing an order to obtaining or producing the goods.
SAFETY STOCK refers to the inventory quantity kept by a company in the event of fluctuating usage or unusual delays in lead time.

MANAGEMENT ADVISORY SERVICES (2 decks)

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