COST AND
MANAGERIAL ACCOUNTING TERMINOLOGY
Abnormal spoilage is spoilage that is not
expected to occur under normal, efficient operating
conditions. The cost of abnormal spoilage should be
separately identified and reported to
management. Abnormal spoilage is typically treated as
a period cost (a loss) because of its
unusual nature.
Absorption costing (sometimes called full
absorption costing) treats all manufacturing costs as
product costs. These costs include variable and fixed
manufacturing costs whether direct or
indirect. Thus, fixed manufacturing overhead is
inventoried. Compare with variable
costing.
Activity-based budgeting applies activity-based
costing principles. It emphasizes
the numerous
activities needed
to produce and market goods and services.
Activity-based costing “identifies the causal
relationship between the incurrence of cost and
activities,
determines the underlying driver of the activities, establishes cost pools
related to
individual
drivers, develops costing rates, and applies cost to product on the basis of
resources
consumed
(drivers)” (IMA).
Activity drivers are cost drivers that measure
the demands on activities by next-stage cost
objects.
Actual costing is based on actual rates and
quantities for indirect as well as direct costs.
Applied (absorbed) overhead is factory (manufacturing) overhead allocated to products
or
services, usually
on the basis of a predetermined rate. Overhead
is over- or underapplied
(absorbed) when
overhead charged is greater (less) than overhead incurred.
Avoidable costs are those that may be eliminated
by not engaging in an activity or by performing
it more
efficiently.
Backflush costing is often used with a
just-in-time (JIT) inventory system when manufacturing
cells are used. It delays costing until goods are
finished. Standard costs are then
flushed
backward through
the system to assign costs to products. The
result is that detailed tracking of
costs is
eliminated. The system is best
suited to companies that maintain low inventories
because costs
then flow directly to cost of goods sold.
Balanced scorecard is an approach to evaluation
of managers that uses multiple measures of
performance. The scorecard is a goal congruence tool
that informs managers about the
nonfinancial
factors that senior management believes to be important. Measures may be
financial or
nonfinancial, short-term or long-term. A
typical scorecard includes measures relating
to profitability,
customer satisfaction, innovation, efficiency, quality, and time.
Benchmarking (also called
competitive benchmarking or best practices) compares one’s own
product, service,
or practice with the best known similar activity. The objective is to measure the
key outputs of a
business process or function against the best and to analyze the reasons for
the
performance difference. Benchmarking applies to services and
practices as well as to products
and is an ongoing
systematic process. It entails both
quantitative and qualitative measurements
that allow both
an internal and an external assessment.
Breakeven analysis (See cost-volume-profit
analysis.)
Budgeting is the formal
quantification of management’s plans. Budgets
(sometimes called profit
plans) are usually
expressed in quantitative terms and are used to motivate management and
evaluate its
performance in achieving goals. In
this sense, standards are established.
Budget variance (also known as the
flexible-budget variance or spending variance). This
variance is the
difference between actual and budgeted fixed overhead in a four-way analysis of
overhead variances. In three-way analysis, the spending
variance combines the variable
overhead spending
variance and the fixed overhead budget variance. In two-way analysis, the
budget
(flexible-budget or controllable) variance is that part of the total overhead
variance not
attributed to the
production volume variance.
By-products are products of
relatively small total value that are produced simultaneously from a
common
manufacturing process with products of greater value and quantity (joint
products).
Carrying cost is the cost of storing or holding
inventory. Examples of carrying
costs include the
cost of capital,
insurance, warehousing, breakage, and obsolescence.
Committed costs result when a going concern holds
fixed assets (property, plant, and
equipment). Examples are insurance, long-term lease
payments, and depreciation.
Common cost is the shared operating cost of a
cost object (plant, facility, activity, etc.) used by
two or more
entities.
Contribution margin is calculated by subtracting all
variable costs from sales revenue. Variable
costs include
both manufacturing variable costs and variable selling and general costs. Fixed
costs (whether
manufacturing or not) are not deducted. The
contribution margin ratio equals unit
contribution margin
divided by unit sales price.
Controllable costs are directly regulated by
management at a given level of production within a
given time span;
e.g., fixed costs are not controllable in the short run. An alternative definition is
that controllable
costs are those the manager can significantly influence.
Controllable variance. In two-way analysis, it is the part of the total factory
overhead variance
not attributable
to the volume variance.
Controller (or comptroller). (S)he is a
financial officer having responsibility for the accounting
functions
(management and financial) as well as budgeting and internal control.
Conversion costs are direct labor and factory
overhead, the costs of converting raw materials
into finished
goods.
Cost is defined by
the IMA as follows: “(1) In
management accounting, a measurement in
monetary terms of
the amount of resources used for some purpose.
The term by itself is not
operational. It becomes operational when modified by a
term that defines the purpose, such as
acquisition cost,
incremental cost, or fixed cost. (2)
In financial accounting, the sacrifice
measured by the
price paid or required to be paid to acquire goods or services. The term ‘cost’
is often used
when referring to the valuation of a good or service acquired. When ‘cost’ is used
in this sense, a
cost is an asset. When the benefits
of the acquisition (the goods or services)
expire, the cost
becomes an expense or loss.”
Cost accounting includes (1) managerial
accounting in the sense that its purpose can be to
provide internal
reports for use in planning and control and in making nonroutine decisions, and
(2) financial
accounting because its product costing function satisfies requirements for
reporting
externally to
shareholders, government, and various outside parties.
Cost allocation is the process of assigning
and reassigning costs to cost objects. It
may also be
defined as a
distribution of costs that cannot be directly assigned to the cost objects that
are
assumed to have
caused them. In this sense,
allocation involves choosing a cost object,
determining the
direct and indirect costs traceable thereto, deciding how costs are to be
accumulated in
cost pools before allocation, and selecting the allocation base. Allocation is
necessary for
product costing, pricing, investment decisions, managerial performance
evaluation,
profitability analysis, make-or-buy decisions, etc.
Cost behavior is the relationship between
costs and activities. It is the
amount of change in a
cost related to
the activity level.
Cost centers are responsibility centers that
are accountable for costs only.
Cost driver. The IMA has defined a cost driver as “a measure of activity,
such as direct labor
hours, machine
hours, beds occupied, computer time used, flight hours, miles driven, or
contracts, that
is a causal factor in the incurrence of cost to an entity.”
Cost objects are the intermediate and final
dispositions of cost pools. Intermediate
cost objects
receive temporary
accumulations of costs as the cost pools move from their originating points to
the final cost
objects. Final cost objects, such as
a job, product, or process, should be logically
linked with the
cost pool based on a cause-and-effect relationship.
Cost of goods
manufactured is equivalent to a
retailer’s purchases. It equals all
manufacturing
costs incurred
during the period, plus beginning work-in-process, minus ending
work-in-process.
Cost of goods
sold equals beginning finished goods
inventory, plus cost of goods manufactured
(or purchases),
minus ending finished goods inventory.
Cost pools are accounts in which a variety
of similar cost elements with a common cause are
accumulated prior
to allocation to cost objects on some common basis. The overhead account
is a cost pool
into which various types of overhead are accumulated prior to their allocation. In
activity-based
accounting, a cost pool is established for each activity.
Cost-volume-profit analysis (also called breakeven
analysis) is a means of predicting the
relationships among
revenues, variable costs, and fixed costs at various production levels. It
allows management
to discern the probable effects of changes in sales volume, sales price,
costs, product
mix, etc. The breakeven point is the
level of sales at which revenues equal the
sum of fixed and
variable costs, so the contribution margin equals fixed costs at the breakeven
point. Hence, the breakeven point in units
equals fixed costs divided by the unit
contribution
margin (unit selling
price – unit variable cost). The
breakeven point in dollars equals fixed costs
divided by the contribution margin ratio (unit
contribution margin ÷ unit selling price).
Differential (incremental) cost is the difference in total cost between two decisions.
Direct costs can be specifically associated
with a single cost object in an economically feasible
way.
Direct (variable) costing. (See variable
costing.)
Direct labor costs are wages paid to labor that can feasibly be specifically
identified with the
production of
finished goods.
Direct materials costs are the costs of materials included in finished goods that
can feasibly be
traced to those
goods.
Direct method of service cost allocation apportions service department costs directly to
production
departments. It makes no allocation
of costs of the services rendered to other
service
departments.
Discretionary costs are characterized by uncertainty
about the relationship between input (the
costs) and the
value of the related output. They
also tend to be the subject of a periodic (e.g.,
annual) outlay
decision. Advertising and research
costs are examples.
Economic value added (EVA) is a more
specific version of residual income. It
equals after-tax
operating income
minus the product of the after-tax weighted-average cost of capital and the
investment base
(total assets – current liabilities).
Efficiency variances (e.g., for direct materials,
labor, or variable overhead) compare the actual
use of inputs
with the budgeted quantity of inputs allowed for the activity level achieved. When
the difference is
multiplied by the budgeted unit cost of the input, the resulting variance
isolates
the cost effect
of using more or fewer units of input than budgeted. An efficiency variance is the
sum of a mix
variance and a yield variance.
Engineered costs are costs having a clear
relationship to output. Direct
materials cost is an
example.
Equivalent unit of production. It is a set of inputs required to
manufacture one physical unit.
Calculating
equivalent units for each factor of production facilitates measurement of
output and
cost allocation
when work-in-process exists.
Factory (manufacturing) overhead consists of all costs other than direct materials and
direct
labor that are
associated with the manufacturing process. It
includes both fixed and variable
costs.
Financial budget. It incorporates the cash and capital budgets, the pro forma balance sheet,
and the pro forma statement of cash
flows. Its emphasis is on obtaining the funds needed to
purchase
operating assets.
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