Management Accounting Glossary

Cost accounting provides information for management accounting and

financial accounting. Cost accounting measures, analyzes and reports financial
and nonfinancial information relating to the costs of acquiring or using
resources in an organization.

Management accountingmeasures analyzes and reports financial and

nonfinancial information that helps managers make decisions to fulfill the
goals of an organization.

Cost management to describe the approaches and activities of managers to

use resources to increase value to customers and to achieve organizational
goals. Cost management decisions include decisions such as the amounts and
kinds of materials used, changes in plant processes and changes in product
design.

Strategic cost management describes cost management that specifically

focuses on strategic issues.

Value chain is the sequence of business function in which customer

usefulness is added to products or services.

Supply chain describes the flow of goods, services and information from the
initial sources of materials and services to the delivery of products to
consumers, regardless of whether those activities occur in the same
organization or in other organization.

Control comprises taking actions that implement the planning decisions,

deciding how to evaluate performance, and providing feedback and learning
to help future decision making.

Cost benefit approach resources should be spent if the expected benefits to

the company exceed the expected cost. The expected benefit and costs may
not be easy to quantify.
Line management such as production, marketing and distribution
management is directly responsible for attaining the goals of the organization.

Staff managementsuch as management accountants and information

technology and human resource management, exist to provide advice and
assistance to line management. A plant manager (a line function) may be
responsible for investing in new equipment. A management accountant works
as a business partner of the plant manager by preparing detailed operating-
cost comparisons of alternative pieces of equipment.

An actual cost is the cost incurred (a historical or past cost)

A budgeted cost, which is a predicted or forecasted cost (a future cost).

Cost as a resource sacrificed or forgone to achieve a specific objective. A cost

(such as direct materials or advertising) is usually measured as the monetary
amount that must be paid to acquire goods or services.

Cost accumulation is the collection of cost data in some organized way by

means of an accounting system.

A cost object, which is anything for which a measurement of cost is desired.

Cost allocation is used to describe the assignment of indirect costs to a

particular cost object.

Cost assignment is a general term that encompasses both (1) tracing direct
costs to a cost object and (2) allocating indirect costs to a cost object.

Cost tracing is used to describe the assignment of direct costs to a particular

cost object.

Direct costs of a cost object are related to the particular cost object and can
be traced to it in an economically feasible (cost-effective) way.

Indirect costs of a cost object are related to the particular cost object but
cannot be traced to it in an economically feasible (cost-effective) way.

A Variable cost changes in total in proportion to changes in the related level

of total activity or volume.
A fixed cost remains unchanged in total for a given time period, despite wide
changes in related level of total activity or volume. Costs are defined as
variable or fixed with respect to a specific activity and fora given time period.

A Cost driver is a variable, such as the level of activity or volume that casually
affects over a given time span. That is, there is a cause and effect relationship
between a change in the level of activity or volume and a change in the level of
total costs.

Relevant range is the band of normal activity level or volume in which there
is a specific relationship between the level of activity or volume and the cost
on question.

Average costA unit cost, also called an average cost, is computed by dividing
total cost by the number of units.

Manufacturing sector companied purchase materials and components and

convert them into various finished goods. Examples are automotive
companies, cellular phone producers, food processing companies, and textile
companies.

Merchandising- sector companies purchase and then sell tangible products

without changing their basic form. This sector includes companies engaged in
retailing (such as bookstores or department stores), distribution, or
wholesaling.

Direct materials inventory. Direct materials in stock and awaiting use in the
manufacturing process (for example, computer chips and components needed
to manufacture cellular phones).

Work- in- process inventory. Good partially worked on but not yet
completed (for example, cellular phones at various stage of completion in the
manufacturing process). Also called work in process.

Finished goods inventory. Goods (for example, cellular phones) completed

but not yet sold.
Direct material costs are the acquisition costs of all materials that eventually
become part of the cost object (work in process and then finished goods) and
can be traced to the cost object in an economically feasible way. Acquisition
costs of direct materials include freight-in (inward delivery) charges, sales
taxes and custom duties.

Direct manufacturing labor costs include the compensation of all

manufacturing labor that can be traced to the cost object (work in process and
then finished goods) in an economically feasible way.

Indirect manufacturing costs are all manufacturing costs that are related to
the cost object (work in process and then finished goods) but cannot be traced
to that cost object in an economically feasible way.

This cost category is also referred to as manufacturing overhead costs or

factory overhead costs. We use indirect manufacturing costs and
manufacturing overhead costs.

Inventorial costs are all costs of a product that are considered as assets in
the balance sheet when they are incurred and that become cost of goods sold
only when the product is sold.

Revenues, are inflows of assets (usually cash or accounts receivable) received

for products or services provided to customers.

Period costs are all costs in the income statement other than cost of goods
sold. Period costs are treated as expenses of the accounting period in which
they are incurred because they are expected to benefit revenues in future
periods.

Cost of goods manufactured refers to the cost of goods brought to

completion, whether they were started before or during the current
accounting period.

Prime costs are all direct manufacturing costs.

Prime costs = Direct material costs + Direct manufacturing labor

Conversion costs are all manufacturing costs other than direct material costs.
Conversion costs represent all manufacturing costs incurred to convert direct
materials into finished goods.

Idle time is wages paid for unproductive time caused by lack of orders,
machine breakdowns, material shortages, poor scheduling, and the like.

A product costs is the sum of the costs assigned to a product for a specific

Cost-volume-profit (CVP) analysis examines the behavior of total revenues,

total costs, and operating income as changes occur in the units sold, the selling
price, the variable cost per unit, or the fixed costs of a product.

Contribution MarginThe difference between total revenues and total

variable costs is called contribution margin. Contribution margin indicates
why operating income changes as the number of units sold changes.

Contribution margin percentage (also called contribution margin ration)

equals contribution margin per unit divided by selling price.

Revenue driver is a variable, such as volume, that causally affects revenues.

The Breakeven point (BEP) is that quantity of output sold at which total
revenues equal total costs – that is, the quantity of output sold that results in
Rs 0 of operating income.

A PV graph shows how changes in the quantity of units sold affect operating
income.

Margin of safety, the amount by which budgeted (or actual) revenue exceed
breakeven revenues. Expressed in units, margin of safety is the sales quantity
minus the breakeven quantity.

Operating leverage describes the effects that fixed costs have on changes in
operating income as changes occur in units sold and contribution margin.

Degree of operating leverage = Contribution margin /Operating income

A Choice criterion is an objective that can be quantified. This objective can

take many forms. Most often the choice criterion is to maximize income or to
minimize costs. The choice criterion provides a basis for choosing the best
alternative action.

Product under costing- a product consumer a high level of resource but is

reported to have a low cost per unit.

Product over costing–a product consumes a low level of resources but is

reported to have a high cost per unit.

Product-cost cross-subsidization means that if a company undercosts one

of its products, then it will overcost at least one of its other product. Similarly,
if a company overcosts one of its products, it will under cost at least one of its
other products. Product-cost cross-subsidization is very common in situations
in which a cost is uniformly spread.

Activity-based costing (ABC) refines a costing system by identifying

individual activities as the fundamental cost objects.

A cost hierarchy categories various activity cost pools on the basis of the
different types of cost drivers, or cost-allocation bases, or different degrees of
difficulty in determining cause-and-effect (or benefits-received) relationships.

Output unit-level costs are the costs of activities performed on each

individual unit of a product or service.

Batch- level costs are the costs of activities related to a group of units of
products or services rather than to each individual unit of product or service.

Product-sustaining cost (service-sustaining costs) is the costs of activities

undertaken to support individual products or services regardless of the
number of units or batches in which the units are produced.

Faculty-sustaining costs are the costs of activities that cannot be traced to

individual products or services but that support the organization as a whole.

Activity-basedmanagement (ABM) is a method of management decision-

making that uses activity-based costing information to improve customer
satisfaction and profitability.
A variance is the difference between actual results and expected
performance.

The static budget, or master budget, is based on the level of output planned
at the start of the budget period. The master budget is called a static budget
for the period is development around a single (static) planned output level.

The static-budget varianceis the different between the actual result and the
corresponding budgeted amount in the static budget.

A favorable variance – has the effect, when considered in isolation , of

increasing operating income relative to the budgeted amount. For revenue
items, F means actual revenues exceed budgeted revenues. For cost items, F
means actual costs are less than budgeted costs.

Aunfavorable variance – denoted U in this book-has the effect, when viewed

in isolation, of decreasing operating income relative to the budgeted amount.
Unfavorable variances are also called adverse variance in some countries.

A flexible budget calculates budgeted revenues and budgeted costs based on

the actual output in the budget period.

The sales-volume variance is the difference between a flexible-budget

amount and the corresponding static-budget amount.

The flexible-budget variance is the difference between an actual result and

the corresponding flexible-budget amount.

The flexible-budget variance for revenues is called the selling-price variance

because it arises solely from the difference between the actual selling price
and the budgeted selling price:

A standard cost is a carefully determined cost of a unit of output

A price variance is the difference between actual price and budgeted price
multiplied by actual input quantity, such as direct materials purchased or
used.
A price variance is sometimes called an input-price variance or
ratevariance, especially when referring to a price variance for direct
manufacturing labor.

An efficiency variance is the difference between actual input quantity used –

such as square yards of cloth of direct materials – and budgeted input quantity
allowed for actual output, multiplied by budgeted price. An efficiency variance
is sometimes called a usage variance.

Effectiveness: the degree to which a predetermined objective or target is met.

Efficiency: the relative amount of inputs used to achieve a given output level-
the smaller the quantity of inputs used to make a given number of cell phones
or the greater the number of cell phones made a given quantity of input, the
greater the efficiency.

Relevant costs are expected future costs.

Relevant revenues are expected future revenues

Past costs are also called sunk costs because they are unavoidable and cannot
be changed no matter what action is taken.

Quantitative factor are outcomes that are measured in numerical terms.

Some qualitative factors are financial; they can be expressed in monetary
terms. Examples include the cost of direct materials, direct manufacturing
labor, and marketing. Other quantitative factors are nonfinancial; they can be
measured numerically, but they are not expressed in monetary terms.

Qualitative factors are outcome that are difficult to measure accurately in

numerical terms. Employee morale is an example.

One type of decision that affects output levels is accepting or rejecting special
orders when there is idle production capacity and the special orders have no
long- run implications. We use the term one –time- only special order.

The sum of all costs (variable and fixed) in a particular business faction of the
chain, such as manufacturing costs or marketing costs are called business
function costs.
Full costs of the product are the sum of all variable and fixed costs in all
business functions of the value chain (R&D, design. Production, marketing,
distribution, and customer service

Decisions about whether a product of goods or services will in source

outsource are also called make- or- buy decision. Surveys of companies
indicate that managers consider quality, dependability of suppliers, and costs
as the most important factors in the make- or- buy decision.

An incremental cost is the additional total cost incurred for an activity. A

differential cost is the difference in total cost between two alternatives.

Incremental revenue is the additional total revenue from an activity.

Differential revenue is the difference in total revenue between two

alternatives.

Deciding to use a resource in a particular way causes a manager to forgo the

opportunity to use the resource in alternative ways. Opportunity cost is the
contribution to operating income that is forgone by not using a limited
resource in its next-best alternative use.

Opportunity cost is the contribution too operating income that forgone by

not using a limited resource in its next-best alternative use.

Product mixdecisions- the decisions made by a company about which

product to sell and in what quantities. These decisions usually have only a
short- run focus because the level of capacity can be expanded in the long run.

Book value original cost minus accumulated depreciation- of existing

equipment is a past cost that is irrelevant.

Goal congruence exists when individuals and groups work toward achieving
the organization’s goals-that is, managers working in their own best interest
take actions that align with the overall goals of top management.

Autonomy is the degree of freedom to make decisions. The greater the

freedom, the greater the economy.
Suboptimal decision making-also called incongruent decision making or
dysfunctional decision making-is most likely to occur when the subunits in
the company are highly interdependent, such as when the end product of one
subunit is used or sold by another subunit.

A transfer price is the price one subunit (department or division) charges for
a product or service supplied to another subunit of the same organization.