Managerial Accounting Final Exam

Balanced Scorecard
an integrated set of performance measures that are derived from and support the organization’s strategy

Common fixed cost
a fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments

Cost center
a business segment whose manager has control over costs but has no control over revenue or investments in operating assets

Decentralized organization
an organization in which decision-making authority is not confined to a few top executives but rather is spread throughout the organization

Economic Value Added (EVA)
a concept similar to residual income in which a variety of adjustments may be made to GAAP financial statements for performance evaluation purposes

Investment Center
a business segment whose manager has control over cost, revenue, and investments in operating assets

Margin
net operating income divided by sales

Net Operating Income
Income before interest and income taxes have been deducted

Operating Assets
cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes

Profit Center
A business segment whose manager has control over cost and revenue but has no control over investments in operating assets

Residual income
the net operating income that an investment center earns above the minimum required return on its operating assets

Responsibility center
any business segment whose manager has control over costs, revenues, or investments in operating assets

Return on Investment (ROI)
Net operating income divided by average operating assets. It also equals margin multiplied by turnover

Segment
any part or activity of an organization about which managers seek cost, revenue, or profit data

Segment margin
a segment’s contribution margin less its traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs

Traceable fixed cost
a fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated

Turnover
sales divided by average operating assets

Market price
the price charged for an item on the open market

Negotiated transfer price
a transfer price agreed on between buying and selling divisions

Range of acceptable transfer prices
The range of transfer prices within which the profits of both the selling division and the buying division would increase as a result of a transfer

Suboptimization
An overall level of profits that is less than a segment or a company is capable of earning

Transfer price
the price charged when one division or segment provides goods or services to another division or segment of an organization

Avoidable cost
a cost that can be eliminated (in whole or in part) by choosing one alternative over another in a decision; this term is synonymous with relevant cost and differential cost

Bottleneck
a machine or some other part of a process that limits the total output of the entire system

Constraint
A limitation under which a company must operate, such as limited available machine time or raw materials, that restricts the company’s ability to satisfy demand

Differential Cost
any cost that differs between alternatives in a decision-making situation. this term is synonymous with avoidable cost and relevant cost

Joint costs
costs that are incurred up to the split off point in a process that produces joint products

Joint products
two or more products that are produced from a common input

Make or buy decision
a decision concerning whether an item should be produced internally or purchased from an outside supplier

Relaxing (or elevating) the constraint
an action that increases the amount of a constrained resource. Equivalently, an action that increases the capacity of the bottleneck

Relevant cost
a cost that differs between alternatives in a decision. this term is synonymous with avoidable cost and differential cost

Sell or process further decision
A decision as to whether a joint product should be sold at the split-off point or sold after further processing

Special order
A one-time order that is not considered part of the company’s normal ongoing business

Split-off point
That point in the manufacturing process where some or all of the joint products can be recognized as individual products

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

vertical integration
the involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service

Capital budgeting
the process of planning significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of a new product

Cost of capital
the average rate of return a company must pay to its long-term creditors and shareholders for the use of their funds

Internal Rate of Return
The discount rate at which the net present value of an investment project is zero; the rate of return promised by a project over its useful life

Net present value
The difference between the present value of an investment project’s cash inflows and the present value of its cash outflows

Out-of-pocket costs
Actual cash outlays for salaries, advertising, repairs, and similar costs

Payback period
The length of time that it takes for a project to fully recover its initial cost out of the net cash inflows that it generates

Postaudit
The follow-up after a project has been approved and implemented to determine whether expected results were actually realized

Preference decision
A decision in which the alternatives must be ranked

Project profitability index
the ratio of the net present value of a project’s cash flows to the investment required

Screening decision
A decision as to whether a proposed investment project is acceptable

Simple rate of return
The rate of return computed by dividing a project’s annual incremental accounting net operating income by the initial investment required

Working capital
current assets less current liabilities

Present Value
The value now of an amount that will be received in some future period

Compound Interest
The process of paying interest on interest in an investment

Discounting
The process of finding the present value of a future cash flow

Discount Rate
The rate of return that is used to find the present value of a future cash flow

Annuity
A series of identical cash flows