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Activity-based costing (ABC)

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A method of allocating overhead based on each product's use of activities in making the product.

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Balanced scorecard

answer

A performance-measurement approach that uses both financial and nonfinancial measures, tied to company objectives, to evaluate a company's operations in an integrated fashion.

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Board of directors

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The group of officials elected by the stockholders of a corporation to formulate operating policies, select officers, and otherwise manage the company

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Chief executive officer (CEO)

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Corporate officer who has overall responsibility for managing the business and delegates responsibilities to other corporate officers

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Chief financial officer (CFO)

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Corporate officer who is responsible for all of the accounting and finance issues of the company.

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Controller

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Financial officer responsible for a company's accounting records, system of internal control, and preparation of financial statements, tax returns, and internal reports

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Corporate social responsibility

answer

The efforts of a company to employ sustainable business practices with regard to its employees and the environment

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Cost of goods manufactured

answer

Total cost of work in process less the cost of the ending work in process inventory

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Direct labor

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The work of factory employees that can be physically and directly associated with converting raw materials into finished goods.

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Direct materials

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Raw materials that can be physically and directly associated with manufacturing the finished product

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Enterprise resource planning (ERP) system

answer

Software that provides a comprehensive, centralized, integrated source of information used to manage all major business processes

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Indirect labor

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Work of factory employees that has no physical association with the finished product, or for which it is impractical to trace the costs to the goods produced

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Indirect materials

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Raw materials that do not physically become part of the finished product or for which it is impractical to trace to the finished product because their physical association with the finished product is too small

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Just-in-time (JIT) inventory

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Inventory system in which goods are manufactured or purchased just in time for sale

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Line positions

answer

Jobs that are directly involved in a company's primary revenue-generating operating activities.

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Managerial accounting

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A field of accounting that provides economic and financial information for managers and other internal users

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Manufacturing overhead

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Manufacturing costs that are indirectly associated with the manufacture of the finished product

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Period costs

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Costs that are a necessary and integral part of producing the finished product

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Product costs

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Costs that are a necessary and integral part of producing the finished product

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Sarbanes-Oxley Act (SOX)

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Law passed by Congress intended to reduce unethical corporate behavior

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Staff positions

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Jobs that support the efforts of line employees

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Theory of constraints

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A specific approach used to identify and manage constraints in order to achieve the company's goals

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Total cost of work in process

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Cost of the beginning work in process plus total manufacturing costs for the current period

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Total manufacturing costs

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The sum of direct materials, direct labor, and manufacturing overhead incurred in the current period

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Total quality management (TQM)

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Systems implemented to reduce defects in finished products with the goal of achieving zero defects

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Treasurer

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Financial officer responsible for custody of a company's funds and for maintaining its cash position

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Triple bottom line

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The evaluation of a company's social responsibility performance with regard to people, planet, and profit

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Value chain

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All activities that a business processes with providing a product or service

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Cost accounting

answer

An area of accounting that involves measuring, recording, and reporting product costs

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Cost accounting system

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Manufacturing-cost accounts that are fully integrated into the general ledger of a company

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Job cost sheet

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A form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job

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Job order cost system

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A cost accounting system in which costs are assigned to each job or batch

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Materials requisition slip

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A document authorizing the issuance of raw materials from the storeroom to production

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Overapplied overhead

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A situation in which overhead assigned to work in process is greater than the overhead incurred

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Predetermined overhead rate

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A rate based on the relationship between estimated annual overhead costs and expected annual operating activity, expressed in terms of a common activity base

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Process cost system

answer

A cost accounting system used when a company manufactures a large volume of similar products

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Time ticket

answer

A document that indicates the employee, the hours worked, the account and job to be charged, and the total labor cost

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Underapplied overhead

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A situation in which overhead assigned to work in process is less than the overhead incurred

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Conversion costs

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The sum of labor costs and overhead costs

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Cost reconciliation schedule

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A schedule that shows that the total costs accounted for equal the total costs to be accounted for

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Equivalent units of production

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A measure of the work done during the period, expressed in fully completed units

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Operations costing

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A combination of a process cost and a job order cost system, in which products are manufactured primarily by standardized methods, with some customization

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Physical units

answer

Actual units to be accounted for during a period, irrespective of any work performed

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Production cost report

answer

An internal report for management that shows both production quantity and cost data for a production department

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Total units (costs) accounted for

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The sum of the units (costs) transferred out during the period plus the units (costs) in process at the end of the period

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Total units (costs) to be accounted for

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The sum of the units (costs) started (or transferred) into production during the period plus the units (costs) in process at the beginning of the period

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Unit production costs

answer

Costs expressed in terms of equivalent units of production

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Weighted-average method

answer

Method of computing equivalent units of production which considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process

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Activity

answer

Any event, action, transaction, or work sequence that incurs cost when producing a product or providing a service

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Activity-based costing (ABC)

answer

An overhead cost-allocation system that allocates overhead to multiple activity cost pools and assigns the activity cost pools to products or services by means of cost drivers that represent the activities used

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Activity-based management (ABM)

answer

Extends ABC from product costing to a comprehensive management tool that focuses on reducing costs and improving processes and decision-making

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Activity cost pool

answer

The overhead cost attributed to a distinct type of activity or related activities

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Batch-level activities

answer

Activities performed for each batch of products rather than for each unit

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Cost driver

answer

Any factor or activity that has a direct cause-effect relationship with the resources consumed. In ABC, cost drivers are used to assign activity cost pools to products or services

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Facility-level activities

answer

Activities required to support or sustain an entire production process

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Just-in-time (JIT) processing

answer

A processing system dedicated to having the right amount of materials, parts, or products arrive as they are needed, thereby reducing the amount of inventory

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Non—value-added activity

answer

An activity that, if eliminated, would not hinder the company's operations or reduce the perceived worth of its product or service

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Product-level activities

answer

Activities performed in support of an entire product line, but not always performed every time a new unit or batch of products is produced

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Unit-level activities

answer

Activities performed for each unit of production

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Value-added activity

answer

An activity that increases the perceived worth of a product or service to a customer

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Activity index

answer

The activity that causes changes in the behavior of costs

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Break-even point

answer

The level of activity at which total revenues equal total costs

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Contribution margin (CM)

answer

The amount of revenue remaining after deducting variable costs

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Contribution margin per unit

answer

The amount of revenue remaining per unit after deducting variable costs; calculated as unit selling price minus unit variable cost

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Contribution margin ratio

answer

The percentage of each dollar of sales that is available to apply to fixed costs and contribute to net income; calculated as contribution margin per unit divided by unit selling price

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Cost behavior analysis

answer

The study of how specific costs respond to changes in the level of business activity

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Cost-volume-profit (CVP) analysis

answer

The study of the effects of changes in costs and volume on a company's profits

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Cost-volume-profit (CVP) graph

answer

A graph showing the relationship between costs, volume, and profits

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Cost-volume-profit (CVP) income statement

answer

A statement for internal use that classifies costs as fixed or variable and reports contribution margin in the body of the statement

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Fixed costs

answer

Costs that remain the same in total regardless of changes in the activity level

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High-low method

answer

A mathematical method that uses the total costs incurred at the high and low levels of activity to classify mixed costs into fixed and variable components

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Margin of safety

answer

The difference between actual or expected sales and sales at the break-even point

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Mixed costs

answer

Costs that contain both a variable- and a fixed-cost element and change in total but not proportionately with changes in the activity level.

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Relevant range

answer

The range of the activity index over which the company expects to operate during the year

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Target net income

answer

The income objective set by management

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Variable costs

answer

Costs that vary in total directly and proportionately with changes in the activity level

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Absorption costing

answer

A costing approach in which all manufacturing costs are charged to the product

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Cost structure

answer

The relative proportion of fixed versus variable costs that a company incurs

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Degree of operating leverage

answer

A measure of the extent to which a company's net income reacts to a change in sales. It is calculated by dividing contribution margin by net income

question

Operating leverage

answer

The extent to which a company's net income reacts to a change in sales. Operating leverage is determined by a company's relative use of fixed versus variable costs

question

Sales mix

answer

The relative percentage in which a company sells its multiple products

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Variable costing

answer

A costing approach in which only variable manufacturing costs are product costs, and fixed manufacturing costs are period costs (expenses)

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Incremental analysis

answer

The process of identifying the financial data that change under alternative courses of action

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Joint costs

answer

For joint products, all costs incurred prior to the point at which the two products are separately identifiable (known as the split-off point)

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Joint products

answer

Multiple end-products produced from a single raw material and a common production process

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Opportunity cost

answer

The potential benefit that is lost when one course of action is chosen rather than an alternative course of action

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Relevant costs

answer

Those costs and revenues that differ across alternatives

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Sunk cost

answer

A cost that cannot be changed or avoided by any present or future decision.

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Budget

answer

A formal written statement of management's plans for a specified future time period, expressed in financial terms

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Budgetary slack

answer

The amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals

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Budget committee

answer

A group responsible for coordinating the preparation of the budget

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Budgeted balance sheet

answer

A projection of financial position at the end of the budget period

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Cash budget

answer

A projection of anticipated cash flows

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Direct labor budget

answer

A projection of the quantity and cost of direct labor necessary to meet production requirements

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Direct materials budget

answer

An estimate of the quantity and cost of direct materials to be purchased

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Financial budgets

answer

Individual budgets that focus primarily on the cash resources needed to fund expected operations and planned capital expenditures

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Long-range planning

answer

A formalized process of identifying long-term goals, selecting strategies to achieve those goals, and developing policies and plans to implement the strategies

question

Manufacturing overhead budget

answer

An estimate of expected manufacturing overhead costs for the budget period

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Master budget

answer

A set of interrelated budgets that constitutes a plan of action for a specific time period

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Merchandise purchases budget

answer

The estimated cost of goods to be purchased by a merchandiser to meet expected sales

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Operating budgets

answer

Individual budgets that result in a budgeted income statement

question

Participative budgeting

answer

A budgetary approach that starts with input from lower-level managers and works upward so that managers at all levels participate

question

Production budget

answer

A projection of the units that must be produced to meet anticipated sales

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Sales budget

answer

An estimate of expected sales revenue for the budget period

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Sales forecast

answer

The projection of potential sales for the industry and the company's expected share of such sales

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Selling and administrative expense budget

answer

A projection of anticipated selling and administrative expenses for the budget period

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Budgetary control

answer

The use of budgets to control operations

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Controllable cost

answer

A cost over which a manager has control

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Controllable margin

answer

Contribution margin less controllable fixed costs

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Cost center

answer

A responsibility center that incurs costs but does not directly generate revenues

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Decentralization

answer

Control of operations is delegated to many managers throughout the organization

question

Direct fixed costs

answer

Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center

question

Flexible budget

answer

A projection of budget data for various levels of activity

question

Indirect fixed costs

answer

Costs that are incurred for the benefit of more than one profit center

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Investment center

answer

A responsibility center that incurs costs, generates revenues, and has control over decisions regarding the assets available for use

question

Management by exception

answer

The review of budget reports by top management focused entirely or primarily on differences between actual results and planned objectives

question

Noncontrollable costs

answer

Costs incurred indirectly and allocated to a responsibility center that are not controllable at that level

question

Profit center

answer

A responsibility center that incurs costs and also generates revenues

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Residual income

answer

The income that remains after subtracting from the controllable margin the minimum rate of return on a company's average operating assets

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Responsibility accounting

answer

A part of management accounting that involves accumulating and reporting revenues and costs on the basis of the manager who has the authority to make the day-to-day decisions about the items

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Responsibility reporting system

answer

The preparation of reports for each level of responsibility in the company's organization chart

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Return on investment (ROI)

answer

A measure of management's effectiveness in utilizing assets at its disposal in an investment center

question

Segment

answer

An area of responsibility in decentralized operations

question

Static budget

answer

A projection of budget data at one level of activity

question

Customer perspective

answer

A viewpoint employed in the balanced scorecard to evaluate the company from the perspective of those people who buy and use its products or services

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Direct labor price standard

answer

The rate per hour that should be incurred for direct labor

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Direct labor quantity standard

answer

The time that should be required to make one unit of product

question

Direct materials price standard

answer

The cost per unit of direct materials that should be incurred

question

Direct materials quantity standard

answer

The quantity of direct materials that should be used per unit of finished goods

question

Financial perspective

answer

A viewpoint employed in the balanced scorecard to evaluate a company's performance using financial measures

question

Ideal standards

answer

Standards based on the optimum level of performance under perfect operating conditions

question

Internal process perspective

answer

A viewpoint employed in the balanced scorecard to evaluate the effectiveness and efficiency of a company's value chain, including product development, production, delivery, and after-sale service

question

Labor price variance

answer

The difference between the actual hours times the actual rate and the actual hours times the standard rate for labor

question

Labor quantity variance

answer

The difference between actual hours times the standard rate and standard hours times the standard rate for labor

question

Learning and growth perspective

answer

A viewpoint employed in the balanced scorecard to evaluate how well a company develops and retains its employees

question

Materials price variance

answer

The difference between the actual quantity times the actual price and the actual quantity times the standard price for materials

question

Materials quantity variance

answer

The difference between the actual quantity times the standard price and the standard quantity times the standard price for materials

question

Normal capacity

answer

The average activity output that a company should experience over the long run

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Normal standards

answer

Standards based on an efficient level of performance that are attainable under expected operating conditions

question

Overhead controllable variance

answer

The difference between actual overhead incurred and overhead bud geted for the standard hours allowed

question

Overhead volume variance

answer

The difference between normal capacity hours and standard hours allowed times the fixed overhead rate

question

Standard cost accounting system

answer

A doubleentry system of accounting in which standard costs are used in making entries, and variances are recognized in the accounts

question

Standard costs

answer

Predetermined unit costs which companies use as measures of performance

question

Standard hours allowed

answer

The hours that should have been worked for the units produced

question

Standard predetermined overhead rate

answer

An overhead rate determined by dividing budgeted overhead costs by an expected standard activity index

question

Total labor variance

answer

The difference between actual hours times the actual rate and standard hours times the standard rate for labor

question

Total materials variance

answer

The difference between the actual quantity times the actual price and the standard quantity times the standard price of materials

question

Total overhead variance

answer

The difference between actual overhead costs and overhead costs applied to work done, based on standard hours allowed

question

Variances

answer

The differences between total actual costs and total standard costs

question

Annual rate of return method

answer

The determination of the profitability of a capital expenditure, computed by dividing expected annual net income by the average investment

question

Capital budgeting

answer

The process of making capital expenditure decisions in business

question

Cash payback technique

answer

A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment

question

Cost of capital

answer

The average rate of return that the firm must pay to obtain funds from creditors and stockholders

question

Discounted cash flow technique

answer

A capital budgeting technique that considers both the estimated net cash flows from the investment and the time value of money

question

Discount rate

answer

The interest rate used in discounting the future net cash flows to determine present value

question

Internal rate of return (IRR)

answer

The interest rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows

question

Internal rate of return (IRR) method

answer

A method used in capital budgeting that results in finding the interest yield of the potential investment

question

Net present value (NPV)

answer

The difference that results when the original capital outlay is subtracted from the discounted net cash flows

question

Net present value (NPV) method

answer

A method used in capital budgeting in which net cash flows are discounted to their present value and then compared to the capital outlay required by the investment

question

Post-audit

answer

A thorough evaluation of how well a project's actual performance matches the original projections

question

Profitability index

answer

A method of comparing alternative projects that takes into account both the size of the investment and its discounted future net cash flows. It is computed by dividing the present value of net future cash flows by the initial investment

question

Required rate of return

answer

The rate of return management expects on investments; also called the discount rate or cost of capital

question

Annuity

answer

A series of equal dollar amounts to be paid or received at evenly spaced time intervals (periodically).

question

Compound interest

answer

The interest computed on the principal and any interest earned that has not been paid or withdrawn

question

Discounting the future amount

answer

The process of determining present value

question

Future value of an annuity

answer

The sum of all the payments or receipts plus the accumulated compound interest on them

question

Future value of a single amount

answer

The value at a future date of a given amount invested, assuming compound interest

question

Interest

answer

Payment for the use of another person's money

question

Present value

answer

The value now of a given amount to be paid or received in the future assuming compound interest.

question

Present value of an annuity

answer

The value now of a series of future receipts or payments, discounted assuming compound interest

question

Principal

answer

The amount borrowed or invested

question

Simple interest

answer

The interest computed on the principal only

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