Managerial Accounting Management Accounting Managerial accounting, also called management accounting, is a method of accounting that creates statements, reports, and documents that help management make better decisions related to their business performance. Managerial accounting is primarily used for internal purposes. semi-variable cost In accounting and economics, a semi-variable cost is an expense that contains both a fixed-cost component and a variable-cost component. It is often used to project financial performance at different scales of production. difference between marginal and absorption costing Marginal Costing Absorption Costing Considers only variable costs. Considers both variable and fixed costs. Fluctuates with sales volume changes. More stable as it includes fixed costs. Lower, as only variable costs are considered. Higher, as it includes both variable and fixed costs. Easier, as costs are closely tied to output. More challenging, as fixed costs are included. No apportionment is required. Requires apportionment of fixed costs. More useful for short-term decisions. Better suited for long-term pricing strategies. Easier to calculate. Complex due to fixed costs consideration. High pricing is based on variable costs. Low, as pricing also includes fixed costs. Profit changes with sales level. Profit is stable until production exceeds sales. Not under GAAP or IFRS. In line with GAAP and IFR sunk cost In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are contrasted with prospective costs, which are future costs that may be avoided if action is taken. A sunk cost is money that has already been spent and cannot be recovered. Budget A budget is a spending plan based on income and expenses. In other words, it's an estimate of how much money you'll make and spend over a certain period, such as a month or year. A budget is a financial document used to project future income and expenses. To put it simply, a budget plans future savings and spending as well as planned income and expenses. Standard costing Standard cost accounting is a traditional cost accounting method introduced in the 1920s, as an alternative to the traditional cost accounting method based on historical costs. standard costing is the practice of estimating expenses in the production process since manufacturers cannot predict actual costs in advance. Manufacturers use this methodology to plan upcoming costs of various expenses, such as labor, materials, production, and overhead. margin of safety The margin of safety (MOS) is the difference between your gross revenue and your break-even point. Your break-even point is where your revenue covers your costs but nothing more. In other words, your business does not make a loss but it doesn't make a profit either. A margin of safety is the difference between the intrinsic value of a stock and its market price. Another definition: In break-even analysis, from the discipline of accounting, a margin of safety is how much output or sales level can fall before a business reaches its break-even point. break-even point In accounting, the breakeven point is calculated by dividing the fixed costs of production by the price per unit minus the variable costs of production. The breakeven point is the level of production at which the costs of production equal the revenues for a product. The breakeven point for a trade or investment is determined by comparing the market price of an asset to the original cost; the breakeven point is reached when the two prices are equal. flexible budgeting Flexible budgets are essentially budgets that can be adjusted depending on revenue and cost changes throughout the fiscal year, accounting for expected unpredictability. Companies first account for the fixed costs they expect, or at least costs that they don't expect to change as the year progresses. cost center A cost center is a function within an organization that does not directly add to profit but still costs money to operate, such as the accounting, HR, or IT departments. The main use of a cost center is to track actual expenses for comparison to the budget. A cost center is a department within a business to which costs can be allocated. The term includes departments that do not produce directly but incur costs to the business when the manager and employees of the cost center are not accountable for the profitability and investment decisions of the business but they are responsible for some of its costs 2015 Management Accounting Reapte committed cost In case you are not familiar with the accounting term, a committed cost is a payment obligation that you can’t recover. You are committed to paying that money no matter what. Money that is obligated for an expense is a committed cost. Once that money is spent, and goes out, it becomes cash out. marginal cost Marginal cost is the change in total production cost that comes from making or producing one more unit. It's calculated by dividing the change in production costs by the change in quantity. You can use marginal cost to determine your optimal production volume and pricing. difference between fixed and flexible budgets. A flexible budget is a financial plan that varies based on activity level or production units. A fixed or static budget is a financial plan that does not change due to activity or output level. Fixed Budget Flexible Budget A fixed budget is a budget that remains static irrespective of the activity level. A flexible budget is a budget that changes as per the necessity of activity level. The fixed budget doesn’t change as per the fluctuations of business. Flexible budget changes as per the fluctuations of business; A fixed budget is always static. A flexible budget is very dynamic. Pretty simple. Quite complex. It is easy to prepare a fixed budget. It is quite tough to prepare a flexible budget since one needs to prepare for all situations. The dissonance between the actual level and the budgeted level is quite high since there is no similarity in activity level The dissonance between the actual level and the budgeted level is quite low. Comparison is difficult since the activity levels are different at the actual level and budgeted level. Comparison is quite easy since the activity levels are quite similar. Pretty rigid, no fluctuation is taken into account. Quite flexible, almost every fluctuation is taken into account. A fixed budget is mostly estimated on assumptions and anticipations. A flexible budget is prepared with realistic situations in mind. contribution margin Contribution margin is the amount of revenue left over after all variable costs have been deducted from total sales. It is a measure of the profitability of individual products or services. Profit margin, on the other hand, is the amount of net income divided by total sales. The margin is the gross profit divided by the total revenue, which creates a ratio. You can then multiply by 100 to make a percentage. Standard costing Repeat cost object A cost object is a term used primarily in cost accounting to describe something to which costs are assigned. Common examples of cost objects are product lines, geographic territories, customers, departments, or anything else for which management would like to quantify cost. linear programming Linear programming is an optimization technique used to maximize total contribution margin of a mix of products, given multiple constraints or requirements. Budget Repeat activity-based costing Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal. 2016 fixed budget A fixed budget, also known as a static budget, is a budget that does not change or adjust to the actual volume of output produced or sales levels achieved. Once it's set, the budgeted amounts for revenues and expenses remain unchanged regardless of actual business performance. controllable cost Controllable costs are considered when the decision to take on the cost is made by one individual. Common examples of controllable costs are office supplies, advertising expenses, employee bonuses, and charitable donations. Controllable costs are categorized as short-term costs as they can be adjusted quickly. variable costing Variable costing is a concept used in managerial and cost accounting in which the fixed manufacturing overhead is excluded from the product cost of production. The method contrasts with absorption costing, in which the fixed manufacturing overhead is allocated to products produced. difference between a functional and a master budget pending contribution margin Repeat Standard cost Repeat profit center A profit center is a branch or division of a company that directly adds or is expected to add to the entire organization's bottom line. It is treated as a separate, standalone business, responsible for generating its revenues and earnings. Linear programming Repeat principal budget factor The principal budget factor is the resource or activity which is limited and which forms the base for the preparation of the budgets. For example, sales volume, raw material, labor hours, or machine hours. 2017 difference between a functional and a master budget pending opportunity cost Opportunity cost is money or benefits lost by not selecting a particular option during the decisionmaking process. Opportunity cost is composed of a business's explicit and implicit costs. Opportunity cost helps businesses understand how one decision over another may affect profitability. Cost center Repeat Standard costing Repeat Step cost Step costs are expenses that are constant for a given level of activity, but increase or decrease once a threshold is crossed. Step costs change disproportionately when the production levels of a manufacturer, or activity levels of any enterprise, increase or decrease. Contribution margin Repeat absorption costing Absorption costing refers to a method of costing to account for all the costs of manufacturing. The management uses this method to absorb the costs incurred on a product. The costs include direct costs and indirect costs. Direct costs include materials and labor used in production. use of the high-low method The high-low method is an easy way to segregate fixed and variable costs. By only requiring two data values and some algebra, cost accountants can quickly and easily determine information about cost behavior. Also, the high-low method does not use or require any complex tools or programs. Activity-based costing Repeat 2018 Profit center Repeat Margin of safety Repeat Break-even point Repeat Standard costing Repeat Sunk cost Repeat Contribution cost Repeat Direct cost. Direct costs are the expenses a business incurs that can be directly tied to the production of a good or the provision of a service. Direct costs are the expenses a business incurs to make a product or deliver a service, or when it buys a wholesale product for resale. Linear programming Repeat Management Accounting Repeat 2019 difference between fixed and flexible budgets. Repeat responsibility center A responsibility center is a functional entity within a business that has its own goals and objectives, dedicated staff, policies and procedures, and financial reports. It is used to give managers specific responsibility for revenues generated, expenses incurred, and/or funds invested. Break-even point Repeat Standard costing Repeat Opportunity cost Repeat Contribution cost Repeat Direct cost. Repeat differential cost Differential cost refers to the difference between the cost of two alternative decisions. The cost occurs when a business faces several similar options, and a choice must be made by picking one option and dropping the other. ABC and linear programming Both Repeat 2020 c/s ratio The contribution to sales (c/s) ratio is a tool used in profit management. C/S ratio = (Sales revenue Variable cost of sales)/Sales revenue x 100. It is often useful in single-product situations, and essential in multi-product situations, to ascertain how much each $ sold contributes towards the fixed costs. This calculation is known as the contribution to sales or C/S ratio. material price variance Material variances are the differences between the actual and the standard costs of materials used in a production process. They are one of the key components of variance analysis, a technique that helps cost accountants identify and explain the reasons for deviations from the budgeted or planned performance. operating statement A statement of operations is a financial statement businesses use to report revenues, cost of goods sold, operating expenses, operating profit, non-operating expenses, and net income (loss). Statement of Operations, also known as an income statement, records a corporation's income and expenses for a particular period (monthly, quarterly, or annually) in a standard accounting format per the accounting policies advised by the governing body. limiting factor A limiting factor is anything that restricts an organization's ability to maximize its sales due to constraints in demand or the availability of production resources. A limiting factor is anything that limits the level of production of the business. It can be a shortage of materials or labor. In marginal costing, it is usually to find the most profitable use of the limited resources. investment centre An investment center is a center that is responsible for its revenues, expenses, and assets and manages its financial statements which are typically a balance sheet and an income statement. n investment center is an organizational unit responsible to top management for its profitability to the unit's investment base. Revenues and expenses are measured as profit centers, but the assets employed are also measured. responsibility accounting responsibility Accounting is management accounting where all the company's management, budgeting, and internal accounting are held responsible. The primary objective of responsibility accounting is to hold responsible all the concerned departments of any particular function. uncontrollable cost An uncontrollable cost is an expense over which a person has no direct control. The concept most commonly applies to the manager of a department, whose departmental expenses include several line items which he cannot alter. If the executive, manager, or department cannot change or control the cost, it is an uncontrollable cost. An example of an uncontrollable cost would be an allocation of administrative expenses to each job or department. master budget A master budget is the central financial planning document that includes how a company will spend and how much it expects to earn in a fiscal year. A master budget contains budgets of departments within the organization and projections that allow for management to plan for the upcoming year. Absorption costing Repeat 2021 avoidable cost An avoidable cost is a cost that is not incurred if the activity is not performed. Put another way, a company can avoid the cost if they no longer produce the good or service. For example, the cost of materials that go into a finished good is avoidable. product life cycle The product life cycle is defined as four distinct stages: product introduction, growth, maturity, and decline. The amount of time spent in each stage will vary from product to product, and different companies have different strategic approaches to transitioning from one phase to the next. CVP analysis Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm's profit. Companies can use CVP to see how many units they need to sell to break even (cover all costs) or reach a certain minimum profit margin. The key CVP formula is as follows: profit = revenue – costs any two flaws of ABC Collection and preparation of data is time-consuming. Costs more to accumulate and analyze information. Source data isn't always readily available from normal accounting reports. what is optimal solution under linear programming An optimal solution to a linear program is the solution which satisfies all constraints with maximum or minimum objective function value. In simpler words, In a linear programming question we are given an objective function, some constraints and we have to find minimum or maximum values. incremental analysis Incremental analysis is a decision-making tool used in business to determine the true cost difference between alternative business opportunities. Also called marginal analysis, the relevant cost approach, or differential analysis, incremental analysis disregards any sunk cost (past cost). shadow price A shadow price is an estimated price for something that is not normally priced or sold in the market. Shadow pricing can provide businesses with a better understanding of the costs and benefits associated with a project. imposed style of budgeting Imposed budgeting, also known as top-down budgeting, is the process wherein the top management of a company prepares a budget and then imposes it on lower-level managers for implementation. function budget The budget is used to control operations during the period covered by the budget. It sets forth expected targets and limitations. The budget projects sales and revenue targets, production targets, and spending limitations for budgeted expenditures. zero based budgeting The zero-based budgeting process is a strategic budgeting approach that mandates a fresh evaluation of all expenses during each budgeting cycle. Unlike traditional budgeting, where previous spending levels are typically adjusted, ZBB requires individuals or organizations to justify every expense from the ground up. different types of standard under standard costing Basic standards Normal standards Current standards Attainable (expected) standards Ideal (theoretical) standards idle time Idle time is the time when employees aren't being productive, but are still being paid. There are two types of idle time: normal and abnormal. Normal idle time is caused by factors management cannot control, such as the amount of time it takes to set up or maintain a machine. Responsibility accounting Repeat Operating statement Repeat describe rule of thumb variance investigation mode Variance investigation models are concerned with decisions to investigate the cause of particular variances and in particular, to distinguish significant deviations from random fluctuations.
