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Managerial Accounting Prelim Performance Report - suggests where operations are

not proceeding as planned and where some parts of


the organization may require additional attention; a
Chapter 1: Managerial Accounting and the Business report that compares budgeted data to actual data to
Environment highlight instances of excellent and unsatisfactory
performance.
Managerial Accounting - concerned with providing
information to managers––people inside an Segments - a part or activity of an organization about
organization who direct and control its operation. which managers would like cost, revenue, or profit
data.
Financial Accounting - concerned with providing
information to stakeholders, creditors, and others Constraints - anything that prevents an organization
who are outside the organization. or individual from getting more of what it wants.

Comparison of Financial and Managerial Accounting Cost Accounting - include defining costs and
Financial Accounting Managerial Accounting valuating inventories to help managers to run
Reports to those outside the Reports to those inside the
businesses.
organization: owners, organization for: planning,
creditors, tax authorities, directing and motivating,
regulators. controlling, performance *The main objective of decision making is to obtain
evaluation, decision making. relevant and materially accurate information that can
Emphasizes financial Emphasizes decisions affecting
lead to correct and unbiased decisions.
consequences of past the future.
activities. *Any incorrect action caused by lag or inaccurate
Emphasizes objectivity and Emphasizes relevance. information may lead to loss-making decisions, or
verifiability. loss of business to companies within or outside their
Emphasizes precision. Emphasizes timeliness.
own countries.
Emphasizes companywide Emphasizes detailed segment
reports. reports about departments,
products, and customers. Strategy - a "game plan" that enables a company to
Must follow GAAP. Need not follow GAAP. attract customers by distinguishing itself from
Mandatory for external Not mandatory.
competitors.
reports.

Planning - involves establishing a basic strategy, *The focal point of a company's strategy should be its
target customers.
selecting a course of action, and specifying how the
action will be implemented; the process of
Customer Value Propositions - a company can only
establishing goals and specifying how to achieve
them. succeed if it creates a reason for customers to choose
it over a competitor.
Directing and Motivating - involve mobilizing people
Customer Intimacy - "you should choose us because
to carry out plans and run routine operations.
we understand and respond to your individual needs
better than our competitors."
Controlling - the process of gathering feedback to
ensure that the plan is actually carried out and is
Operational Excellence - "you should choose us
appropriately modified as circumstances change.
because we can deliver products and services faster,
Budget - a detailed plan for the future, usually more conveniently, and at a lower price than our
competitors."
expressed in formal quantitative terms.

Product Leadership - "you should choose us because


Chief Financial Officer (CFO) - the member of the top
management team who is responsible for providing we offer higher quality products than our
competitors."
timely and relevant data to support planning and
control activities and for preparing financial
Value Creation - the principle underlying all that
statements for external users.
organizations do to create value for their
Control - managers seek to ensure that the plan is stakeholders.
being followed; the process of instituting procedures
Business Process - a series of steps that are followed
and then obtaining feedback to ensure that all parts
in order to carry out some task in a business.
of the organization are functioning effectively and
moving toward overall company goals.
Value Chain - consists of major business functions
that add value to a company's products and services.
Feedback - signals whether operations are on track;
accounting and other reports that help managers
Lean Production - a management approach that
monitor performance and focus on problems and/or
opportunities that might otherwise go unnoticed. organizes resources such as people and machines
around the flow of business processes and that only
produces units in response to customer orders; it is 5. Long-Term Orientation - individuals are more
often called just-in-time production. willing to save and invest for the future.

Intrinsic Motivation - refers to motivation that comes Ethical Behavior - is the lubricant that keeps the
from within us. economy running; the foundation of managerial
accounting.
To be perceived as a credible leader you'll need to
possess these attributes: Statement of Ethical Professional Practice - describes
• Technical competence in some detail the ethical responsibilities of
• Personal integrity management accountants.
• Strong communication skills
• Strong mentoring skills A management accountant has ethical responsibilities
• Strong listening skills in four broad areas:
• Personal humility 1. To maintain a high level of professional
competence.
Extrinsic Incentives - highlight important goals and 2. To treat sensitive matters with confidentiality.
motivate employees to achieve them. 3. To maintain personal integrity.
4. To disclose information in a credible fashion.
Cognitive Bias - distorted thought process.
Code of Ethics for Professional Accountants - governs
Optimism Bias - being overly optimistic in assessing the activities of all professional accountants
the likelihood of future outcomes. throughout the world.

Self-Enhancement Bias - overestimating ones Corporate Governance - the system by which a


strengths and underestimating ones weaknesses company is directed and controlled; is properly
relative to others. implemented it should provide incentives for top
management to pursue objectives that are in the
Confirmation Bias - a bias where people pay greater interests of the company and it should effectively
attention to information that confirms their monitor performance.
preconceived notions, while devaluing information
that contradicts them. Sarbanes-Oxley Act of 2002 - was intended to protect
the interests of those who invest in publicly traded
Groupthink Bias - a bias where some group members companies by improving the reliability and accuracy
support a course of action solely because other of corporate financial reports and disclosures.
group members do.
Public Company Accounting Oversight Board -
Five dimensions of Cultural Measures that may affect conduct investigations, take disciplinary actions
national and organizational cultures: against audit firms, and enact various standards and
1. Power Distance - power in institutions and rules concerning the preparation of audit reports.
organizations is unevenly distributed; individuals
readily accept that privileges are given to people Enterprise Risk Management - a process used by a
with power, position, wealth, or status. company to help identify the risks that is faces and to
develop responses to those risks that enable the
2. Individualism - individuals in general view company to be reasonably assured of meeting its
themselves as independent of collectives and are goals.
more motivated by their own preferences, need,
right, etc. Raw Materials - materials that are used to make a
product.
Collectivism - links individuals who see themselves as
part of one or more collectives; these individuals are Corporate Social Responsibility - a concept whereby
primarily motivated by the norms of, and duties organizations consider the needs of all stakeholders
imposed by, the collectives. when making decisions; it extends beyond legal
compliance to include voluntary actions that satisfy
3. Uncertainty Avoidance - individuals are stakeholder expectations.
uncomfortable with uncertainty and hence seek
avenues including regulations, legislations, and Just-in-Time - a production and inventory control
investment in technology to reduce. system in which materials are purchased and units are
produced only as needed to meet actual customer
4. Masculinity - men are dominant force; this culture demand.
values competitiveness, aggressiveness, success,
and materialistic achievements. Non-Value-Added Activities - activities that consumer
resources but do not add value for which customers
Femininity - emphasizes close personal relationships, are willing to pay.
supportiveness, and quality of life.
Six Sigma - a method that relies on customer Fixed Manufacturing Overhead - includes
feedback and objective data gathering and analysis depreciation or rent on manufacturing facilities which
techniques to drive improvement. will remain unchanged regardless of the level of
production.
Supply Chain Management - a management
approach that coordinates business processes across Selling Costs - include all costs that are incurred to
companies to better serve end consumers. secure customer orders and get the finished product
to the customer.
Theory of Constraints (TOC) - a management
approach that emphasizes the importance of Administrative Costs - include all costs associated
managing constraints. with the general management of an organization
rather than with manufacturing or selling.

Chapter 2: Cost Concepts Product Costs - include all costs involved in acquiring
or making a product; also known as inventoriable
Summary of Cost Classifications costs.
Purpose of Cost Classification Cost Classifications
1. Assigning costs to cost • Direct cost
*Product costs are treated as expenses in the period
object • Indirect cost
2. Accounting for costs in • Manufacturing costs
in which the related products are sold.
manufacturing • Direct materials
companies • Direct labor Period Costs - are all costs that are not product costs.
• Manufacturing overhead
• Nonmanufacturing costs
• Selling costs *Period costs are expensed on the income statement
• Administrative costs in the period in which they are incurred using the
3. Preparing financial • Product costs usual rules of accrual accounting.
statements • Period costs
*All selling and administrative expenses are
4. Predicting cost behavior • Variable cost
in response to changes • Fixed cost considered to be period costs.
in activity • Mixed cost
5. Making decisions • Differential cost Prime Cost - the sum of direct materials cost and
• Sunk cost
• Opportunity cost
direct labor cost.

Raw Materials - the materials that go into the final Conversion Cost - the sum of direct labor cost and
product. manufacturing overhead cost.

Direct Materials - materials that become an integral Raw Materials - materials that are used to make a
part of the finished product and whose costs can be product.
conveniently traced to the finished product.
Work in Process - consists of units of product that are
Indirect Materials - are included as part of only partially complete and will require further work
manufacturing overhead. before they are ready for sale to a customer.

Direct Labor - consists of labor costs that can be Finished Goods - consist of completed units of
easily traced to individual units of product; product that have not yet been sold to customers.
sometimes called touch labor.
Cost of Goods Manufactured - consists of the
Indirect Labor - labor costs that cannot be physically manufacturing costs associated with goods that were
traced to particular products, or that can be traced finished during the period.
only at great cost and inconvenience.
Inventoriable Costs - these costs go directly into
*Indirect labor is treated as part of manufacturing inventory accounts as they are incurred rather than
overhead. going into expense account.

Manufacturing Overhead - includes all manufacturing Cost Behavior - refer to how a cost reacts to changes
costs except direct materials and direct labor. in the level of activity.

*Manufacturing overheads associated with operating Variable Cost - a cost that varies, in total, in direct
the factory are included in inventory and transferred proportion to changes in the level of activity.
to cost of goods sold when the related goods are
sold. Fixed Cost - a cost that remains constant, in total,
regardless of changes in the level of activity.
Variable Manufacturing Overhead - includes the
variable element of utility costs which will go up as Relevant Range - the range of activity within which
more products are manufactured. the assumptions about variable and fixed costs are
valid.
Cost Object - anything for which cost data are Quality Cost - all of the costs that are incurred to
desired. prevent defects or that result from defects in
products.
Direct Cost - a cost that can be easily and
conveniently traced to a specified cost object. Keep defective products from falling in the hands of
customers:
Indirect Cost - a cost that cannot be easily and • Prevention costs
conveniently traced to a specified cost object. • Appraisal costs

*To be traced to a cost object such as a particular Defects occur despite efforts of prevent them:
product, the cost must be caused by the cost object. • Internal failure costs
• External failure costs
Common Cost - a cost that is incurred to support a
number of cost objects but cannot be traced to them Prevention Costs Internal Failure Costs
Systems development Net cost of scrap
individually.
Quality engineering Net cost of spoilage
Quality training Rework labor and overhead
Differential Cost - a difference in costs between any Quality circles Reinspection of reworked
two alternatives. Statistical process control products
activities Retesting of reworked
Supervision of prevention products
Differential Revenue - a difference in revenues activities Downtime caused by quality
between any two alternatives. Quality data gathering, problems
analysis, and reporting Disposal of defective products
Quality improvement projects Analysis of the cause of
Incremental Cost - an increase in cost from one Technical support provided to defects in production
alternative to another. suppliers Re-entering data because of
Audits of the effectiveness of keying errors
the quality system Debugging software errors
Decremental Cost - decreases in cost.
Appraisal Costs External Failure Costs
Test and inspection of Cost of field servicing and
Marginal Revenue - the revenue that can be obtained incoming materials handling complaints
from selling one more unit of product. Test and inspection of in- Warranty repairs and
process goods replacements
Final product testing and Repairs and replacements
Marginal Cost - the cost involved in producing one inspection beyond the warranty period
more unit of product. Supplies used in testing and Product recalls
inspection Liability arising from defective
Supervision of testing and products
Opportunity Cost - the potential benefit that is given inspection activities Returns and allowances arising
up when one alternative is selected over another. Depreciation of test from quality problems
equipment Lost sales arising from a
Maintenance of test reputation for poor quality
*Virtually every alternative involves an opportunity equipment
cost. Plant utilities in the inspection
area
Field testing and appraisal at
Sunk Cost - a cost that has already been incurred and
customer site
that cannot be changed by any decision made now or
in the future.
Prevention Costs - support activities whose purpose
is to reduce the number of defects.
Cost of Goods Manufactured - costs of the goods
brought to completion during the accounting period.
Quality Circles - consist of small groups of employees
that meet on a regular basis to discuss ways to
Idle Time - machine breakdowns, material shortages,
improve quality.
power failures.
Statistical Process Control - a technique that is used
Overtime Premium - the additional payment on top
to detect whether a process is in or out of control.
of the basic paid.
Appraisal Costs - sometimes called inspection costs;
Labor Fringe Benefits - made up of employment-
are incurred to identify defective products before the
related costs paid by the employer and include the
products are shipped to customers.
costs of insurance programs, retirement plans, various
supplement unemployment benefits, and
*Each employee is his or her own quality control
hospitalization plans.
person.

Quality of Conformance - the degree to which a


Internal Failure Costs - result from identifying defects
product or service meets or exceeds its design
before they are shipped to customers.
specifications and is free of defects or other problems
that mar its appearance or degrade its performance.
*The more effective a company's appraisal activities, *Total fixed costs remain constant within the relevant
the greater the chance of catching defects internally range of activity.
and the greater the level of internal failure costs. *The average fixed cost per unit becomes
progressively smaller as the level of activity increases.
External Failure Costs - result when a defective *Fixed costs should be expressed in total rather than
product is delivered to a customer. on a per unit basis.

*When the quality of conformance is low, total quality Types of Fixed Costs:
cost is high and that most of this cost consists of 1. Committed Fixed Costs - investments in facilities,
costs of internal and external failure. equipment, and the basic organization often
*A company can reduce its total quality cost by cannot be significantly reduced even for short
focusing its efforts on prevention and appraisal. periods of time without making fundamental
*Appraisal can only find defects, whereas prevention changes.
can eliminate them.
2. Discretionary Fixed Costs - often referred to as
Quality Cost Report - details the prevention costs, managed fixed costs; arise from annual decisions
appraisal costs, and costs of internal and external by management to spend on certain fixed cost
failures that arise from the company's current quality items.
control efforts.
Differences between Discretionary and Committed
Uses of Quality Cost Information: Fixed Costs:
1. Quality cost information helps managers see the • The planning horizon for a discretionary fixed
financial significance of defects. cost is short term. Committed fixed costs have a
2. Quality cost information helps managers identify planning horizon that encompasses many years.
the relative importance of the quality problems • Discretionary fixed costs can be cut for short
faced by their companies. periods of time with minimal damage to the
3. Quality cost information helps managers see long-run goals of the organization.
whether their quality costs are poorly distributed.
*The step-variable costs can often be adjusted
ISO 9000 Standards - quality control requirements quickly as conditions change.
issued by the International Organization for *Once fixed costs have been set, they usually cannot
Standardization that relate to products sold in be changed easily.
European countries.
Mixed Cost - contains both variable and fixed cost
elements; also known as semivariable costs.
Chapter 3: Cost Behavior: Analysis and Use
Account Analysis - an account is classified as either
Cost Structure - the relative proportion of each type variable or fixed based on the analyst's prior
of cost in an organization. knowledge of how the cost in the account behaves.

Variable Cost - a cost whose total dollar amount Engineering Approach - cost analysis involves a
varies in direct proportion to changes in the activity detailed analysis of what cost behavior should be,
level. based on an industrial engineer's evaluation of the
production methods to be used, the materials
*Variable cost remains constant if expressed on a per specifications, labor requirements, equipment usage,
unit basis. production efficiency, power consumption, and so
on.
Activity Base - a measure of whatever causes the
incurrence of variable cost; sometimes referred to as *Account analysis works best when analyzing costs at
a cost driver. a fairly aggregated level.

Step-Variable Cost - the cost of a resource that is Dependent Variable - cost; the amount of cost
obtained in large chunks and that increases or incurred during a period depends on the level of
decreases only in response to fairly wide changes in activity for the period.
activity.
Independent Variable - activity; it causes variations in
*The relation between cost and activity is a curve; the cost.
curvilinear.
Linear Cost Behavior - cost behavior is said to be
Relevant Range - range of activity within which the linear whenever a straight line is a reasonable
assumptions made about cost behavior are approximate for the relation between cost and
reasonably valid. activity.
High-Low Method - begin by identifying the period Operating Leverage - a measure of how sensitive net
with the lowest level of activity and the period with operating income is to a given percentage change in
the highest level of activity. dollar sales.

Least-Squares Regression Method - uses all of the *If operating leverage is high, a small percentage
data to separate a mixed cost into its fixed and increase in sales can produce a much larger
variable components. percentage increase in net operating income.

Multiple Regression - an analytical method that is Degree of Operating Leverage - a measure, at a


used when the dependent variable is caused by more given level of sales, of how a percentage change in
than one factor. sales volume will affect profits.

Contribution Margin - the amount remaining from Sales Mix - the relative proportions in which a
sales revenue after all variable expenses have been company's products are sold.
deducted.

Contribution Approach - an income statement format Chapter 5: Absorption Costing and Variable Costing
that organizes costs by their behavior.
Absorption Costing - a costing method that includes
all manufacturing costs.
Chapter 4: Cost-Volume-Profit Relationships
Variable Costing - a costing method that includes
*The greatest danger lies in relying on simple CVP only variable manufacturing costs.
analysis when a manager is contemplating a large
change in sales volume that lies outside the relevant Allocation Base - a measure such as direct labor-
range. hours or machine-hours that is used to assign
overhead costs to products and jobs.
Break-Even Point - the level of sales at which profit is
zero. Predetermined Overhead Rate - is computed by
dividing the total estimated manufacturing overhead
*Once the break-even point has been reached, net cost for the period by the estimated total amount of
operating income will increase by the amount of the the allocation base.
unit contribution margin for each additional unit sold.
*If sales are zero, the company's loss would equal to Overhead Application - process of assigning
its fixed expenses. overhead cost to products or jobs.

Cost-Volume-Profit (CVP) Graph - the relationships Normal Cost System - applies overhead to products
among revenue, cost, profit, and volume; sometimes by multiplying a predetermined overhead rate by the
called break-even chart. actual amount of the allocation base incurred by the
products.
Contribution Margin Ratio (CM Ratio) - the
contribution margin as a percentage of sales. Underapplied or Overapplied Overhead - the
difference between the overhead cost applied to
*The CM ration shows how the contribution margin product and the actual overhead costs of a period.
will be affected by a change in total sales.
Cost Driver - a factor that causes overhead costs.
Variable Expense Ratio - the ratio of variable
expenses to sales.
Chapter 6: Cost Allocations of Service Departments
Incremental Analysis - consider only those items of
revenue, cost, and volume that will change if the new Operating Department - a department in which the
program is implemented. central purposes of the organization are carried out.

Target Profit Analysis - estimate what sales volume is Service Department - a department that does not
needed to achieve a specific target profit. directly engage in operating activities, rather, it
provides services or assistance to the operating
Margin of Safety - the excess of budgeted (or actual) departments.
sales dollars over the break-even volume of sales
dollars. Direct Method - any of the allocation base
attributable to the service departments themselves if
*The higher the margin of safety, the lower the risk of ignored, only the amount of the allocation base
not breaking even and incurring a loss. attributable to the operating departments is used in
the allocation.
Lever - a tool for multiplying force.
Step-Down Method - any amount of the allocation
base that is attributable to a service department
whose cost has already been allocated is ignored.

Reciprocal Method - gives full recognition to


interdepartmental services.