Glindex A Combined Glossary/Subiect

A

ABC. See Activity-based costing (ABC)Absorption costing. The costing

method where products "absorb"both fixed and variable manufac-turing costs, 332-338

Absorption costing income statement,334,420,421.

Account analysis. A method for deter-mining cost behavior that is basedon a manager's judgment in classify-ing each general ledger account as avariable, fixed, or mixed cost,31,7-320

Accounting rate of return (ARR). Ameasure of profitability computedby dividing the average annual oper-ating income from an asset by theinitial investment in the asset. 471.476478,497

Accounts receivable turnover. Measurea company's ability to collect cashfrom credit customers. To computeaccounts receivable turnover, dividenet credit sales by average netaccounts r eceiv able, 7 28

Accrual accounting, 47 6Acid-test ratio. Ratio of the sum of

cash plus short-term investmentsplus net current receivables to totalcurrent liabilities. Tells whether theentity can pay all of its current liabil-ities if they come due immediately.Also called the quick ratio,727

Activity-based costing (ABC). Focuseson activities as the fundamental costobjects. The costs of those activitiesbecome the building blocks for com-piling the indirect costs of products,services, and custome rs, 238-246assessing product profitability

with,240-246cost- benefit test, 249 -Z 5 0development of system for,

238-239

using for decision making,247-249

using for job costing, 239-240Activity-based management (ABM).Using activity-based cost informa-tion to make decisions that increaseprofits while satisfying customer'sneeds, 247-249

Activity cost allocati on rates, 237Advertising, 50Allocate. To assign an indirect cost to

a cost object, 54Allocation base. A common denomi-

nator that links indirect costs to costobjects (such as jobs or productionprocesses). IdeallS the allocationbase is the primary cost driver of theindirect cost, 1,22

Annuities. A stream of equalinstallments made at equal timeintervals,481calculating future value of,

484-485calculating present value of,

485-488internal rate of return with,

495496net present value with, 490-491'

Appraisal costs. Costs incurred todetect poor-quality goods or ser-vices,259,260

Assetscapital,470residual value of, 493-494return on,731totaI, 690,731

Assign. To attach a cost to a costobject, 54

Audit committee. A subcommittee ofthe board of directors that is respon-sible for overseeing both the internalaudit function and the annual finan-cial statement audit by CPAs.

Average costs. The total cost dividedby the number of units, 72-73

Average unit costs, 183

B

BAII Plus calculator, 529-536Balanced scorecard. Measures that

recognize that management mustconsider financial performance mea-sures and operational performancemeasures when judging the perfor-mance of a company and its sub-units,671.-676

Balance sheets, 67-68. See alsoFinancial statements

budgeted,554comparative, 7 1.7 -7 1.8, 720horizontal analysis of, 7 1.7-7 1.8vertical analysis of,720

Benchmarking. The practice of com-paring a company with other com-panies that are leaders, 54L-542,670,72L-722

against industry average, 722against key competitor, 721,

Blame, 563Board of directors. The body elected

by shareholders to oversee thecompany,T

Book value per share of commonstocl<. Common stockholders' equifydivided by the number of shares ofcommon stock outstanding. Therecorded amount for each share ofcommon stock outstan ding, 7 33-7 34

Breakeven point. The sales level atwhich operating income is zero:Total revenues equal total expenses.

affect of changes in fixed costson, 380

affect of changes in sales priceon,377

affect of changes in variable costson, 378

finding, using CVP analysis,36s-368.382-384

graphing,371.Budgeted balance sheet, 554Budgeted income statement, 548Budgeted manufacturing overhead

rate. !23

G-l

G.2 Glindex

Budgeted statement of cash flows,554-555, 556

Budgets. Quantitative expression ofa plan that helps managers coordi-nate and implement the plan, 3. Seealso Capital budgetingbenefits o1,540-542capital expenditures, 543cash, 551-554employee acceptance of, 555-556tlnancral. JJ I-JJ6flexible,596-602inventorS purchases, and cost of

goods sold, 546-547master, 4, 542-545. 569operating, 545-548operating expenses, 547for planning and controlling,

539-540rolling up unit, 557-558sales, 545-546sensitivity analysis fo4 556-557static, 597, 622uses of, 539-542using, to control operations,

558-563Budget variances, 4Business activities, in value chain,

49-51.Business decisions. See DecisionsBusiness environment, 18-25Business functions, 234-23 5Business sectors, 47-49Business-to-business (82B)

e-commerce,21

cCapital, cost of, 688Capital assets, 470Capital budgeting. The process of

making capital investment deci-sions. Companies make capitalinvestments when rhey acquire capi-tal assets, assets used for a longperiod of time, 470-473comparing methods of, 497-498methods of,471process, 472-473using accounting rate of return,

476-478using discounted cash flow models,

488-497using payback period, 473-476

Capital expenditures budget. A com-pany's plan for purchases of properryplant, equipment, and other long-term assets, 543

Capital rat ioning. Choosing amongalternative capital investments dueto l imited funds, 472,492-493

Capital turnover. The amount of salesrevenue generated for every dollar ofinvested assets; a component of theROI calculation computed as salesdivided by total assets, 685

Cash budgets. Details how the busi-ness expects to go from the begin-ning cash balance to the desiredending balance. Also cal led thestatement of budgeted cash receiptsand payments, 551-554

Cash collections, budgeted, 551Cash flow models, discounted,

488497Cash flows, 471472

budgeted statement of, 554-555,556

discounting, 485-488net cash inflows, 471-475,

477478, 489, 490-492Cash payments, budgeted, 552-553Centralized decision making. Refers

to companies in which all majorplanning and operating decisionsare made by top managemenq 666

Certified Financial Manager (CFM).A professional certif ication issuedby the IMA to designate expertise inthe areas of f inancial statementanalysis, working capital policy,capital structure, business valuation,and risk management, 11

Certif ied Management Accountant(cMA), 11

Certified public accountants (CPAs),7-8,1.9

Chief executive officer (CEO). Theposition hired by the board of direc-tors to oversee the company on adaily basis, 7

Chief financial officer (CFO). Theposition responsible for all of thecompany's financial concerns, 7

Chief operating officer (COO). Theposition responsible for overseeingthe company's operations, 7

Climate for action, 675-676

Committed fixed costs. Foxed cosrsthat are locked in because of previous

-management decisions; managementhas little or no control over thesecosts in the short run, 306

Common-size statement. A financialstatement that reports only percent-ages (no dollar amounts),721,722

Communication, 54L, 669Companies, comparisons between,

720-721,Comparative balance sheets,

717-719,720Comparative income statements,

716-717,719Competence, 12Competition

global,20time-based, 20-23

Competitive adv antage, 41.4Competitors, benchmarking

against,721.Compound interest. Interest com-

puted on the principal and all inter-est earned to date, 481

Confidentiality, !2Constraints. A factor that restricts pro-

duction or sale of a product, 434436Continuous improvement philosophy.

A philosophy requiring employees tocontinually look for ways to improveperformance ,24-25

Contribution margin. Sales revenueminus variable expenses, 334-335,362-363,379

Contribution margin approach, todecision making, 41.7-41,8

Contribution rnargin income state-ments. An income statement thatgroups costs by behavior rather thanfunction; can only be used by inter-nal management, 326-327, 335,362-363,420,431

Contribution margin per unit. Theexcess of the unit sales price over thevariable cost per unit. Also calledunit contribution margin, 363

Contribution margin ratio. Ratio ofcontribution margin to sales revenue,363-3 6 5, 3 67 -368, 3 69, 383-384

Control decisions, using ABC, 248Controllable costs. Costs that cdrr v

be influence or changed by manage-ment,68-69

Controller. The position responsiblefor general financial accounting,managerial accounting and taxreporting, 7

Controlling. One of management'sprimary responsibilities; evaluatingthe results of business operationsagainst the plan and making adjust-ments to keep the company pressingtoward its goal, 3

Conversion costs. The combinationof direct labor and manufacturingoverhead costs,58, 173

Coordination, 541Core competencies, 414Corporate scandals, 18Cost allocated systems, need for

more accurate,233-237Cost allocation. Assigning indirect

costs to cost objects, 111for activities, 243-245

Cost allocation base, 135Cost assignment. A general term that

refers to both tracing direct costsand allocating indirect costs to costobjects, L11

Cost behaviors. Describes how costschange as volume changes, 302-31,4determining, 31,7-326fixed costs, 306-309high-low method for, 320-322mixed costs, 309-311regression analysis of, 322-325relevant range and, 31,1,-31,3step costs, 373-31,4variable costs, 303-306

Cost-benefit analysis. Weighing costsagainst benefits to help make deci-sions,2415for ABC, 249-250of quality programs, 260:262

Cost centers. A subunit responsibleonly for controlling costs, 559,560,669performance reports, 679

Cost distortion. Overcosting someproducts while undercosting otherproducts,234

Cost driver. The primary factor thatcauses a costr 122

Cost equations. A mathematical equa-tion for a straight line that expresseshow a cost behaves, 304, 307,320-326

Costing. See also Activity-basedcosting; Job costing; Processcostlng

absorption, 332-338just-in-time, 266:268product,4

. i tvar laDle. 55L-JJ /

Cost objects. Anything for whichmanagers want a separate measure-ment of costs, 53-54

Cost of capital, 688Cost of goods manufactured. The

manufacturing cost of the goodsthat finished the production processthis period, 63-64calculation of,64-66

Cost of goods sold, 55, 63, I29-I30Cost of quality reports. A report that

lists the costs incurred by the com-pany related to qualiry The costs arecategorized as prevention costs,appraised costs, internal failure costs,and external failure costs, 258

Cost per unit of output, 682Cost-plus pricing. An approach to

pricing that begins with the prod-uct's full costs and adds a desiredprofit to determine a cost-plus price,108-109, 425-427

Cost predictionsdata concerns andr 326using high-low method, 325using regression analysis, 325

Cost reports, production,'1..9 5-19 6Costs

account analysis of, 31.7-320activity,237affect of volume on,302-31.4allocating, 54appraisal, 259,260assigning, 54averag% 72-73average unit, 183controllable, 68-69conversion, 58,1.73cutting,248differential,69direct, 53-54duplication of,668external failure, 259, 260in financial statements. 62-68Iixed, 7 0-7 1, 303, 306-309,

379-381,43L432flexible budget, 598-600flow of, in costing, 168-L72

Glindex

flow of, through inventory accounts,66-67

functional separation of, 326-327indirect, 53-54,234internal failure, 259, 260irrelevant, 69-70, 415-41,6labor,629labor compensation, 58-59manufacturing, 5 6-58, 7 1.,

1.21.-1.26, 332, 611-61,2marginal, T3materials, 1.1.1.-1.1.4merchandising, 55-56mixed, 303, 309-31 1, 37Lnoninventoriable, 134operating, 54opportunity,440overhead, 121-126per equivalent units, 1,81,1,92per iod, 54, 59, 62-68,332,333prevention, 258-259, 260prime, 58product, 54-58, 59, 62-68,

105,333relevant, 69-7 0, 31.1.-31.3, 41. 541.6standard, 609-627step, 313-314sunk, 70,416total,72-7 3,72-73, 1 80-1 83,

192-1.93, 31,1,-313total fixed, 307total mixed, 309total variable,304transferred-in, 1 8 8uncontrollable, 68-69unit , 183, L95variable, 7 0-7 1., 303-306, 31.2,

377-379Costs of qualitS 258-262Cost systems, need for accurate,

233J34Cost tracing. Assigning direct costs to

cost objects that used those costs, L11Cost variances

direct labor, 61.9-622for direct materials, 61.3-61.8use of, 623-624

Cost-volume-profit (CVP) analysis.Expresses the relationship amongcosts, volume, and profit or loss.assumptions , 361-362for changing business conditions,

376-384components of,361.contribution margin ratio, 3 63-3 6 5data requiredfor,36leffect of sales mix on, 381-384

G.4 Glindex

graphing relationships, 370-37 1planning profits wing, 368-37 1sensitivity analysis with, 37 6-3 84unit contribution margin, 362-363usefulness of,360using to find breakeven point,

365-368Credibility, 12Cross-functional teams. Corporate

teams whose members represent var-ious functions of the organization, 8

Current assets, 68Current ratio. Current assets divided

by current liabilities. Measures abil-ity to pay current liabilities withcurrent assets, 725-727

Curvilinear costs. A cost behaviorthat is not linear, 3L4

Customer perspective, 672, 673-67 4Customer relations, 667Customer satisfaction ratings, 67 4Customer service. Support provided

for customers after the sale. 51

D

Dataconcerns with,326relevant, 415-416scatter plots of, 318-320

Days'-sales-in-receivables. Ratio ofaverage net accounts receivable to oneday's sale. Indicates how many days'sales remain in Accounts Receivableswaiting collection, 728-729

Debt, ability to pay long-rerm,729-730

Debt ratio. Ratio of total liabilities tototal assets. Shows the proportion ofa company's assets that is financedwith debt,729

Decentralized operations. Refers tocompanies that are segmented intosmaller operating units; unit man-agers make planning and operatingdecisions for their units.666-669

advantages of,667disadvantages of, 668

Decision making. One of manage-ment's primary responsibil i t ies;identifying possible courses ofaction and choosing among them, 4

centralized.666cost-benefit analysis, 24-25decentralized, 666-669full product costs for, 54

internal, 332,334job costing and, 1.07-109by managers,4l.4-41.8qualitative factors in, 41,7relevant information for. 41 5416using activity-based costing,

247-249using costs of quality, 260-262using ratios, 725-734

Decisions. See also Invesrmenrdecisions

to drop products, departments, orterntones, 430434

outsourcing, 437441product mix,434437regular pricing, 421.-427sell as is or process further, 441443short-term special, 41.7-418,

430443special sales order, 418421

Defect rate, 67 5Demand, limited, and product mix,

436437Demand-pull systems, 257Departmental overhead rate. Separate

manufacturing overhead rates estab-lished for each department,236

Departments, dropping, 430-434Depreciation, 57-58, 690Design. Detailed engineering of prod-

ucts and services and the processesfor producing them, 50

Differential cost. The difference incost between two alternative coursesof action,69

f)irect costs. A cost that can be tracedto a cost object, 53-54

Directing. One of management's pri-mary responsibilities; running thecompany on a day-to-day basis, 3

Direct labor (DL). The cost of com-pensating employees who physicallyconvert raw materials into com-pany's products; labor costs that aredirectly traceable to the finishedproduct, 56, 58-59, 11,5-1,1,7assigning,629variances in,61.9-622

Direct materials (DM). Primary rawmaterials that become a physicalpart of a finished product and whosecosts are traceable to the finishedproduct, 56analyzing variances in, 61 3-6 1 8recording use of,629

Discounted cash flow models,488497,498

internal rate of return, 494-497net present value, 489-494

Discounting,24Discounting cash flows, 485-488Discount rate. Management's mini-

mum desired rate of return on aninvestment. Also called the hurdlerate and required rate of return,490

Discretionary fixed costs. Fixed coststhat are a result of annual manage-ment decisions; fixed costs that arecontrollable in the short run, 306

Distribution. Delivery of products orservices to customers, 51

Dividend yield. Ratio of dividendsper share of stock to the stock'smarket price per share. Tells the per-centage of a stock's market valuethat the company returns to stock-holders annually as dividends, 733

E

Earnings per share (EPS). Amount ofa company's net income for eachshare of its outstanding commonstock,732

E-commerce,20,21-22Economic value added (EVA). A

residual income measure calculatingthe amount of income generated bythe company or divisions in excessof stockholders' and long-term cred-itors' expectations, 687-689

Economies, shifting, 19-20Efficiency variances. Measures whether

the quantity of materials or labor usedto make the actual number of outputsis within the standard allowed for thatnumber of outputs.direct labor, 620-621,direct materials, 61,7pitfalls,622use of, 623-624

Electronic billing, 21Electronic commerce, 20, 21,-22Employee capabilities, 67 5-67 6Employee compensation, 58-59Employee performance, evaluation

of, using variances, 623-624Employee roles, in JIT systems, 257Employees, acceptance of budget by

555-556

Enterprise resource planning (ERP)systems. Software systems that canintegrate all of a company's world-wide functions, departments, anddata in to a single system, 20-21,132-133,394

Equityreturn on,731-732trading on,732

Equivalent units, 1 73-1 7 4, 17 8-180computing output in terms of,

178-1,80, 190-L9'i.cost per, 181r 1.92

Ethical dilemmas, 1,1,-1,4Ethics, 11.-12Expectations, communica tion of , 6 69Expert knowledge, 667External failure costs. Costs incurredwhen the company does not detectpoor-quality goods or services untilafter delivery is made to customers,259,260

External reporting, inventoriableproduct costs for, 54-55

F

Federal Insurance Contributions Act(FICA),58

Feedback, 3,670Financial accounting, 2-3, 5-6Financial budget. The cash budget

(cash inflows and outflows), thebudgeted period-end balance sheet,and the budgeted statement of cashf lows,543

Financial budgets, preparation of,551-556

Financial performance, 563Financial performance measurement.

See also Performancemeasurement

cost centers, 679investment centers, 682-69 1,limitations of , 670-671,, 689-691,profit centers, 680-682revenue centers, 680

Financial perspective, 672, 67 3Financial statement analysis

horizontal analysis, 7 16-7 18methods of.71.5red flags rn,734vertical analysis, 7 1,9-721,

Financial statements, 6. See alsoBalance sheets; Incomestatements

comparative, T26costs in, 62-68of manufacturing companies, 63-64of merchandising companies, 62-63period covered by,714of service companies, 62

Finished goods inventory. Completedgoods that have not yet been sold, 48

First-in, first-out (FIFO) method, 175Fixed costs. Costs that do not change in

total despite wide changes in volume,70-71.,303,306-309avoidable,432changing, and CVP analysis,

379-381,characteristics of, 308committed, 306discretionary, 306relevant ranges ofr 312targe\ 424unavoidable.431432

Fixed expense line, 370Flexible budgets. A summarized bud-

get prepared for different levels ofvolume.defined, 597-598performance evaluation using,

600-602for planning, 598-600use of, by managers, 596-602

Flexible budget variance. The differ-ence arising because the companyactually earned more or less revenueor incurred more or Iess cost thanexpected for the actual level of out-pvt, 602-603, 605-606

401(k) plans, 58Fringe benefits, 58-59Full product costs. The costs of all

resources used throughout the valuechain for a product,54,55, 105

Future vaIue, 482-485, 5 19-520

G

Generally accepted accounting prin-c ip les (GAAP),6

Global marketplace, 20Goal congruence. Aligning the goals

of subunit managers with the goalsof top management, 668,669

Goods, finished, 1.27-1.28Graphs

of CVP relationships, 370-37 1

Glindex G.5

of flexible budget costs,599-600,601

scatter plots, 318-320Gross margin growth, 673,682Gross profit, 334-335

H

Health insurance premiums, 58HighJow method. A method for deter-

mining cost behavior that is based ontwo historical data points: the highestand lowest volume of activitv.320-322.325

Historical information, on costs, 317Horizontal analysis. Study of percent-

age changes in comparative finan-cial statements, 7 1,6-7 1,8

Hurdle rate,490

I

Illegal behavior, vs. unethicalbehavior, 14

Incomereconciling differences in, 336-337residual, 686-687

Income statement approach, to find-ing breakeven point,365-366,369-370

Income statements. See alsoFinancial statements

absorption costing, 334, 420, 421,budgeted, 548common-si2e,721,722comparative, 7 16-7 17, 7 1-9contribution margin, 326-327,

335,362-363,420,431.horizontal analysis of , 7 1,6-7 1,7of manufacturing companies, 64of merchandising companies, 62-63operating,371.of service companies, 62standard cost,632-633variable costing contribution margin,

335-336vertical analysis of, 71,9

Incremental analysis approach,417-41.8,420441

for deciding when to seLI,441,443for dropping products, 431.-433for outsourcing decisions, 438-439

Indirect costs. A cost the related tothe costs object but cannot be tracedto it. 53-54.234

G.6

Indirect labor. Labor costs that aredifficult to trace to specific products,57-59.116-117

Indirect materials. Materials whosecosts are difficult to trace to specificproducts, 57

Industry ayerag% benchmarkingagainst,722

Inflation,326Information

nonfinancial, 417relevant, 415-416, 417

Information systemsadvances, 20-21capabilities, 67 5-676

Information technologyjob costing and, 132-133for sensitivity analysis, 556-557sensitivity analysis and, 384

Inputs, standard costs of, 611,-612Institute of Management Accountants

(IMA). The professional organiza-tion that promotes the advancementof the management accountingprofession, l l

Insurance, 57lntegrity,1.2Intercept coefficient, 322Interest

compound,481simple,481

Interest-coverage ratio. Ratio ofincome from operations to interestexpense. Measure the number oftimes that operating income cancover interest expense. Also calledthe times-interest earned ration, 730

Interest rates,495Internal audit function. The corDo-

rate function charged with assesslngthe effectiveness of the company'sinternal controls and risk manage-ment policies, 7-8

Internal business per spectiv e, 67 2 )674-67s

Internal decision making, full prod-uct costs for, 54

Internal failure costs. Costs incurredwhen the company detects and cor-rects poor-quality goods or servicebefore delivery to customer, 259, 260

Internal rate of return (IRR). The rateof return (based on discounted cashflows) that company can expect toearn by investing in a capital asset.The interest rate that makes NPV of

the investment equal to zero, 471,494497,498

calculation of, 526-528, 534-536International O ryanization f or

Standardization (ISO), 23-24International trade, 20Internet, 20Inventoriable product costs. All costs

of a product that GAAP requirescompanies to treat as an asset forexternal financial reporting. Thesecosts are not expenses until the prod-uct is sold, 54-59,62-68,105

Inventoryrecording sale and release of,

630-631in traditional production

systems, 255types of, 48

Inventory accounts, flow of coststhrough, 66-67

Inventory flow assumptions, 175Inventorg purchases, and cost of

goods sold budget, 546-547Inventory turnover, Ratio of cost of

goods sold to average inventory.Indicates how rapidly inventory issold,727-728

Investment centers. A subunit responsi-ble for generating profits and effi-ciently managing the division'sinvested capital (assets), 5 59, 560, 669financial performance of, 682-691

Investment decisions. See alsoCapital budgeting

time value of money and, 481-488using accounting rate of return,

476-478using discounted cash flow models,

488-497using payback period, 473476

Investments, stock, 7 32-7 3 4Irrelevant costs, 69-7 0, 41 5416ISO 900 1 :2000 certification. 23-24

tJob completion, accounting for,

127-128

Job costing. The system for assigningcosts to a specific unit or to a smallbatch of product or services that (1)pass through production steps as adistinct identifiable job and (2) canvary considerably in materials,labor, and overhead costs, 107-110

accounting for completion and saleof finished goods, 1,27-128

accounting for manufacturinglabor.115-117

accounting for manufacturingoverhead, I2t-1.26

accounting for materials, 1,1,1,-1,14closing manufacturing overhead,

128-131,decision making and, 107-109information technology fo4 132-133in manufacturing company, 1.32-1,34vs. process costing, 168-172in service companies, 134-136steps in, 110-111summarizing job's cost, 1.07-1.09using activity-based costing for,

239-240Job cost record. The document that

accumulated the direct materials,direct labor, and manufacturingoverhead costs assigned to eachindividual job, 108, 1.09,1.13, LL6

Job costs, flow of, through accounts,1,09-1,1,0

Jobs, allocating manufacturing over-head to, 122-126

Journal entriesin process costing, 1,93-1,95standard cost accounting systems,

628-631Just-in-time (JIT) costing. A standard

costing system that starts with out-put completed and then assignsmanufacturing costs to units soldand to inventories. Also called back-flush costing.example of,266-268features of,266

Just-in-time (JIT) management. Asystem in which a company pro-duces just in time to satisfy needs.Suppliers deliver materials just intime to begin production, and fin-ished units are completed just intime for delivery ro cusromers,22-23, 2 5 6-2 5 8, 356-35 8

K

Kaplan, Robert, 671Key performance indicators (KPIs).

Summary performance measuresthat help managers assess whetherthe company is achieving its long-term and short-term goaIs, 67 1,-67 6,682.683

Glindex

L-

Laboraccounting for manufacturing,

115-117direct, 56, 58-59, 115-117,

61.9-622,629indirect, 57, 58-59, 116-117

Labor costs,629Labor time record. Identifies the

employee, the amount of time spenton a particular job, and the laborcost charged to the job; a recordused to assign direct labor cost tospecific jobs, 115-116

Lag indicators. Performance mea-sures that indicate past perfor-mance,670

Lead indicators. Performance mea-sures that forecast future perfor-mance,670

Learning and growth perspective,672,675-676

Leverage. Earning more income onborrowed money than the relatedinterest expense, thereby increasing

, the earnings for the owners of the'

business. Also called trading onequity,732

Liabilities, measuring ability to pay,725-727

Long-term debt, ability to pay,729-730

Loss, operating,37l

M

Make-or-buy decisions, 437-441,Management

activity-base d, 247 -249just-in-time, 22-23, 2 5 6-2 5 8,

356-3s8Management accountants

ethical challenges for, tI-I4within organization structure, 7-8roles of, 8-9salaries of, 10skills require d for, 9-L0

Management by exception. Directsmanagement 's attent ion to impor-tant differences between actual andbudgeted amounts, 5 61,-5 62

'.-- Managerial accounting, vs. financialaccounting, 2-3,5-6

Managersdecision making by, 4'1"44'1.8

motivation of,670performance measures of, 560-563responsibilities of, 3-4use of budgets by, 539-542use of flexible budgets by, 596-602

Manager's incentives, absorptioncosting and,337-338

Manufacturers, 19Manufacturing companies. A com-pany that uses labor, plant, andequipment to convert raw materialsinto new finished products, 47-48

financial statements of, 63-64inventoriable product costs for,

56-58job costing in, 1.32-'1.34master budget foq 569noninventoriable costs in, !34

Manufacturing costs, 56-58, 71, 332in absorption costing, 332-337indirect, 121.-1.26standard, 61.1.-612in variable costing, 332-337

Manufacturing cycle time,257, 67 5Manufacturing labor, accounting for,

11,5-1,17Manufactur ing overhead (MOH).

All manufacturing costs other thandirect materials and direct labor.Also called factory overhead andindirect manufacturing cost, 57-58accounting for, 1,21,-1,26allocating to jobs, 1.22-1,26allocation of, using ABC,240-246closing, 631closing, at year-end, 1,28-1,31,costing methods and, 333-338overallocated, I28recording, 630standard rates for, 61.0-61.1.underallocated, 1,28variance analysis, using standard

costs,624-627Marginal cost. The cost of producing

one more unit,73Margin of safety. Excess of expected

sales over breakeven sales. The dropin sales a company can absorb with-out incurring an operating loss,385-386

Marketing. Promotion and advertis-ing of products or services, 50

Markets, global,20Market share.674

G.7

Master budget. The set of budgetedfinancial statements and supportingschedules for an entire organization.Includes the operating budget, thecapital expenditure budget, and thefinancial budget.components o1,542-543for manufacturing companies, 569preparation of, 542-545for service companies, 569

Master budgets, 4Materials

accounting for, 1,1,1,-1,1,4direct, 56,629rndrrect- .),/purchasing, ll lraw,628recording costs of, 114using, 1 12-1 13

Materials record, 11,2Materials requisition. Request for the

transfer of both direct and indirectmaterials from Raw MaterialsInventory to the production floor,112-113

Merchandising companies. A com-pany that resells tangible productspreviously bought from suppliers,47,48financial statements of, 62-63inventoriable product costs for,

55-56using ABC in,248-249

Mixed costs. Costs that change, but notin direct proportion to changes in vol-ume. mixed costs have both variablecost and fixed cost components, 303,309-3L1.,371,

Money, time value of,481-488Motivation, 667,670

N

Net cash inflows, 471.478,489,490-492.495-497

Net present value (NPV). The differ-ence between the present value ofthe investment's net cash inflowsand the investment's cost,470, 471.,489-494,498calculation of, 524-526, 531.-534

New York Stock Exchange,TNoninventoriable costs, 134North American economies. 19:20Norton, David,671.

G-8 Glindex

oOn-time deliveries, 674Operating budget. Projects sales rev-

enue, cost of goods sold, and oper-ating expenses, leading to the bud-geted income statement thatprojects operating income for theperiod, 543-548

Operating costs, 54Operating expenses, cash payments

for. 552-553Operating expenses budget, 547Operating income, 371Operating leverage. The relative

amount of fixed and variable coststhat make up a firm's total costs,386-389

Operating leverage factor. At a givenlevel of sales, the contribution mar-gin divided by operating income.The operating leverage factor indi-cated the percentage change in oper-ating income that will occur from a1,o/o change in sales volume,387

Operating loss, 371,Operating performance, 563Operations, decentralized, 666-669Opportunity costs. The benefit fore-

gone by not choosing an alternativecourse of action,440

Organizational structure, 7-8Out l iers. Abnormal data points;

data points that do not fall in thesame general pattern as other datapoints, 31.9,326

Outputcomputation of, in equivalent

units, 178-1 80, 1.90-1.91.cost per unit of,682

Outsourcing. A make-or-buy deci-sion: Managers decide whether tobuy a component product or serviceor produce it in-house, 413-414,437-441

Oyerallocated manufacturing over-head. The manufacturing overheadallocated to 'Work in ProcessInventory is more than the amountof manufacturing overhead costsactually incurred, 128

Overhead. See also Manufacturingoverhead (MOH)

allocation of.630

Overhead flexible budget variance.The difference between the actualoverhead cost and the flexible bud-get overhead for the actual numberof outputs, 624-625

Overhead rate, 1.22-1.23departmental,236plantwide,235standard manufacturing, 610-611

P

Payback period. The length of time ittakes to recover, in net cash inflows,the cost of capital oudays, 470,471.,497

Payroll taxes, 58Percentage of market share, 674Performance evaluation sYstems.

669-670Performance indicators

for investment centers, 683-691,KPIs, 671.-676, 682, 683lag indicators, 670lead indicators,6T0linking company goals to,671.

Performance measurement, 669-67 6.See also Financial perfor-mance measurement

balanced scorecard for, 67 1-67 6goals of, 669-670of investment centers, 682-691,limitations of, 670-671., 689-691,using flexible budgets, 600-602using varian ces, 623-624

Performance reports, 603cost centeg 679profit center, 680-682responsibility accounting, 5 60-5 63revenue center. 680

Period costs. Operating costs that areexpensed in the period in which theyare incurred, 54, 59, 62-68,332,333

Physical units, flow of,178,1,90Planning. One of management's pri-

mary responsibilities; setting goalsand objectives for the company anddeciding how to achieve them, 3, 4budgets for, 539-541flexible budgets for, 598-600using ABC,248

Plantwide overhead rate. Nfhen over-head is allocated to eYery productusing the same manufacturing over-head rate, 235

Post-audits. Comparing a capitalinvestment's actual net cash inflowsto its projected net cash inflows,472

Post-sales service. 675Predetermined manufacturing over-

head rate. An estimated manufac-turing overhead allocation ratecomputed at the beginning of theyear, calculated as the total esti-mated manufacturing overheadcosts divided by the total estimatedquantity of the manufacturing over-head allocation base, 122-123

Present value, 24, 482-484. See alsoNet present value (NPV)

calculation of, 485-488 , 529-531,tables of, 51,7-518

Present value index, 493Prevention costs. Costs incurred to

avoid poor-quality goods or ser-vices, 258-2 59,260

Price/earnings ratio. Ratio of themarket price of a share of commonstock to the company's earnings pershare. Measure the value that thestock market places on $1 of a com-pany's earnings, 733

Price-setters , 422423Price standards, 609-610Price-takers, 422-423Price variances. The difference in

prices (actual price per unit minusstandard price per unit) of an inputmultiplied by the actual quantity ofthe input.direct labor, 61,9-620direct materials,61,6pitfalIs,622use of, 623-624

Pricingcost-plus, 108-109, 425-427regular, 421.-427special orders, 41.8-421targe\ 423425using ABC, 247-248

Prime costs. the combination of directmaterial and direct labor costs, 58

Process costing. System for assigningcosts to large numbers of identicalunits that usually proceed in contin-uous fashion through a series of uni-form production steps or processes,1,06-107building blocks of, 1,73-17 5

i l lustrat ion of. 17 5-177vs. job costing, L68-L72journal entries in, 1,93-1,9 5overview, 168-172steps in, 178-1,83, 1,88-1,93transferred-in costs and, 188weighted-average method of, 175

Product costing, 4Product costs, 54-58, 59,333FIFO methodof,175

in financial statements, 62-68full, 54, 105inventoriable, 54-55, 55-59, 1,05traditional, 256

Product development, 675Product life cycle. The length of time

between a product's initial develop-ment and its discontinuance in themarket,690

Production. Resources used to pro-duce a product or services or to pur-chase finished merchandise intendedfor resale, 50just-in-time, 22-23, 25 6:258traditional, 255

Production cost reports, 195-L96Production efficiency, 67 5Production volume variance. The dif-

ference between the manufacturingoverhead cost in the flexible budgetfor actual outputs and the standardoverhead allocated to production,625-627

Product life cycles, 690Product mix decision s. 247 -248.

434437Products

assessing profitability of, usingABC,24OJ46

deciding when to selI,441,-443dropping,430434

Professional association, 1 1Profitability

assessing, using ABC, 240-246measuring, 730-732

Profitability index. An index thatcomputes the number of dollarsreturned for every dollar invested,with all calculations performed inpresent value dollars. Computed aspresent value of net cash inflowsdivided by investment. Also calledpresent value index, 492493

Profit centers. A subunit responsiblefor generating revenue and control-l ing costs, 559, 560, 669,679performance reports, 680-682

Profitsgross, 334-335planning, using CVP analysis,

368-371,target, 368-370, 377, 37 8, 380, 382

Promotion,50Purchases. Resources used to produce

a product or services or to purchasefinished merchandise intended forresale. 50cash payments for, 552raw materiaIs,629

aQualitative f.actors, 41.7Quality, 257,258-262Quality initiatives, evaluation of,

260-262Quantity standards, 609Quick ratio. Ratio of the sum of cash

plus short-term investments plus netcurrent receivables to total currentIiabiIities, T2T

R

Rate of return on comnlon stockholders'equity. Net income minus preferreddividends divided by average com-mon stockholders' equity. A mea-sure of profitabil ity. Also calledreturn on equitS 731.-732

Rate of return on net sales. Ratio ofnet income to net sales. A measureof profitabil ity. AIso called returnon sales, 730

Rate of return on total assets. Netincome plus interest expense dividedby average total assets. This ratiomeasures a company's success inusing its assets to earn income for thepeople who finance the business. Alsocalled return on assets. 731

Ratiosaccount receivable turnov eg 7 28acid-test,727book value per share of common

stock.733-734current, 725-727

Glindex G-9

days' -sales-in-receivable s, 7 28-7 29debt,729for decision making, 725-734dividend yield,733earnings per share,732inventory turnover, 7 27 -728price/earnings, 733quick,727rate of return on net sales, 730return on assets. 731return on equity, 731,-732times-interest- earned, 7 30

Raw materials, 56,628Raw materials inventory. All raw

materials not yet used in manufac-turing, 48

Regression analysis. A statistical pro-cedure for determining the line thatbest fits the data by using all of thehistorical data points, not just thehigh and low data points, 322-325

Relevant costs, 69-7 0, 41 5-416Relevant information. Expected

future data that differs among alter-natives, 41,5-41,6, 41,7

Relevant information approach, todecision making, 41,741,8

Relevant range. The band of volumewhere total fixed costs remain con-stant at a certain level and where thevariable cost per units remains con-stant at a certain level, 3 1 1-3 1 3, 599

Required rate of return, 490Research & development (R6.D).

Researching and developing new orimproved products or services or theprocesses for producing them, 50

Residual income (RI). A measure ofprofitability and efficiency com-puted as the excess of actual incomeover a specified minimum accept-able income, 686-687, 689

Residual value,493494Responsibility, delegation of, 667Responsibility accounting. A system

for evaluating the performance ofeach responsibility center and itsmanager, 558-563, 679-682

Responsibility centers. A part or sub-unit of an organization whose man-ager is accountable for specificactivities. 558-560. 668-669

G-lO Gl index

Retailers. merchandising companythat sells to consumers.20.49

Retention, 667Retirement plans, 58Return on assets. Net income plus

interest expense divided by averagetotal assets. This ratio measures acompany's success in using its assetsto earn income for the people whofinance the business. Also called rateof return on total assets, 731

Return on equity. Net income minuspreferred dividends divided by aver-age common stockholders'equity. Ameasure of profitability. Also calledrate of return on common stock-holders' equity, 731,-732

Return on investment (ROI), A mea-sure of profitability and efficiencycomputed as operating incomedivided by total assets, 673,683-686,689

Return on sales. Ratio of net incometo net sales. A measure of profitabil-ity. Also called rate of return on netsales. , /JU

Revenue centers. A subunit responsibleonly for generating revenue, 559,560,669,679performance reports, 680

Revenue growth, 682Risk indicators, 385-389

margin of safety, 385-386operating leverage, 3 86-3 89

R-square statistic, 323

sSalaries, l0Sale of finished goods, accounting

for,127-128Sales, rate of return on,730Sales budget,545-546Sales margin. The amount of income

earned on every dollar of sales; acomponent of the ROI calculationcomputed as operating incomedivided by sales, 684-685

Sales mix. The combination of prod-ucts that make up total sales,381-384

Sales priceschanging, and CVP analysis,

376-377special, 418-421

Sales revenue growth, 673Sales revenue line, 370Sales volume variance. The difference

between a static budget amount anda f lexible budget amount ar is ingonly because the number of unitsactually sold differs from the staticbudget units, 602-604, 606

Sarbanes-Oxley Act (20021. A con-gressional act that enhances internalcontrol and financial reportingrequirements and establishes newregulatory requirements for publiclytraded companies and their inde-pendent auditors, 1,8-1,9

Scatter plots, 318-320Self-scanning checkouts, 20Selling, general, and administrative

(SG&A)costs,54Senior executiYes, 7-8Sensitivity analysis. A "what-if" tech-

nique that asks what results will beif actual prices or costs change or ifan underlying assumption changes,376-384for budgeting, 556-557information technology and, 384information technology for,

5 56-5 57net present value and, 493494

Service companies. A company thatsells intangible services rather thantangible products, 19, 47, 48allocating costs in, 695-696financial statements of, 62inventoriable product costs for, 56job costing in, 1.34-736master budget for, 569using ABC in,248-249

Setup times, 257Shortcut approach, to finding

breakeven point, 3 66-3 68Short-term decisions, special,

41.741.8,430443Short-term focus, 690-691.Simple interest. Interest computed

only on the principal amount,481Special order decisions, 418-42IStandard cost accounting systems,

628-633Standard cost income statement,

632-633Standard costs. A budget for a single

unit.609-627

analyzing direct labor varianceswith.619-622

analyzrng direct material varianceswith. 613-618

analyzing manufacturing overheadvariances using, 624-627

of inputs, 61,1,-61,2manufacturing overhead rates,

61.0-611price standards, 609-61,0quantity standards, 609

Statement of budgeted cash receiptsand payments, 551-554

Statement of cash flows, budgeted,554-555

Statement of Ethical ProfessionalPractice (IMA), 11., 1.2, 1.3

Static budgets. The budget prepared foronly one level of sales volume. Alsocalled the master budget, 597, 622

Static budget variance, 602Step costs. A cost behavior that is

fixed over a small range of activityand then jumps to a different fixedlevel with moderate changes in vol-ume, 3L3-314

Stockholders, profit expectationsof,422

Stock investments, 7 32-734Strategic Finance, 1,7Sunk costs. A past cost that cannot be

changed regardless of which futureaction is taken, 70,4'1,6

Supply chain management. Exchangeof information with suppliers toreduce costs, improve quality andspeed delivery of goods and servicesform suppliers to the company itselfand on to customers , 22,257

T

Target fixed cost,424Target full cost. The total cost to

develop, design, produce, market,deliver, and service a product,423

Target pricing, 423-425Target profit, 368-370, 382

affect of changes in fixed costson. 380

affect of changes in sales priceon,377

affect of changes in variable costson,378

Territories, dropping, 430434

Throughput tirne. The time betweenbuying raw materials and sellingfinished products, 22

TI-83 calcul ator, 521.-528TI-83 Plus calculator, 521.-528TI-84 calculator, 521.-528TI-84 Plus calculator, 521-528Time-based competition, 20-23Times-interest-earned ratio. Ratio of

income from operations to interestexpense. Measures the number oftimes operating income can coverinterest expense, 730

Time value of money. The fact thatmoney can be invested to earnincome over time, 481488calculations, 521.-524, 529-534factors affecting, 481,482future value,482485present value, 482-484, 485-48 8

Total assets, 690,731,Total costs

assigning, to units completed,181-183, 1.92-1.93

calculation of,72-73, relevant range and, 311,-31,3

. summaizing, in process costing,1,80-181,192

Total expense line, 371Total fixed costs, 307Total mixed costs, 309Total quality management (TQM). A

philosophy of delighting cus-tomers by providing themwith superior products andservices. Requires improvingquality and eliminatingdefects and waste throughoutthe value chain,22-24,258-262

Total variable cost, 304Trace. To assign a direct cost to a cost

object, 53Trading on equity. Earning more

income on borrowed money thanthe related interest expense, therebyincreasing the earning for the own-ers of the business. Also calledI r^^levefage) / 5z

Traditional production systems,255,256

Training,667

- Transferred-in costs. 188

Treasurer. The position responsiblefor raising the firm's capital andinvesting funds, 7

Trend percentages. A form of horizon-tal analysis in which percentages arecomputed by selecting as base year as100'/" and expressing amounts forfollowing years as a percentage of thebase amount, 718

UUncontrollable costs. Costs that can-

not be changed or influenced in theshort run by management,6S-69

Underallocated manufacturing over-head. The manufacturing overheadallocated to \Work in ProcessInventory is less than the amount ofmanufacturing overhead costs actu-ally incurred, 128

Unethical behavior, vs. il legalbehavior, 14

Unit budgets, rolling up, 557-558Unit contribution margin, 362-363,

366,369,379Unit costs, 1.83,1.95Unit managers, motivation of,670Unit variable costs, 424

V

Vacation benefits, 58Value chain. the activities that add

value to a firm's products and ser-vices. Includes R&D, design, produc-tion or purchases, marketing, distrib-ution, and customer service, 105

business activities in, 49-51.coordinating activities across, 51

Value engineering. Reevaluatingactivities to reduce costs while satis-fying customer needs, 248

Variable costing. The costing methodthat assigns only variable manufac-turrng costs to products, 332-337

Variable costing contribution marginrncome statement, 33 5-336

Variable costs. Costs that change intotal in direct proportion to changesin volume, 70-71, 303-306

changing, and CVP analysis,377-379

relevant ranges of,312

Glindex G.l1

Variance. The difference between anactual amount and the budget, 597.See also specific types

Vertical analysis. Analysis of a finan-cial statement that reveals the rela-tionship of each statement item to aspecified base, which is the 100%figure, 719-721

Volume, affect of, in costs, 302-31,4

wWaste elimin ation,256\il/eighted-average contribution

margin, 381,-382Weighted average cost of capital

(WACC). The company's cost ofcapital; the target rate of return usedin EVA calculations to represent thereturn that investors and long-termcreditors expect, 688

Weighted-average method of processcosting, 175

Wholesaler. Merchandising compa-nies that buy in bulk from manufac-turers, mark up the prices, and thensell those products to retailers, 47

Work in process invenfory. Goods thatare partway through the manufactur-ing process but not yey complete, 48

Working capital. Current assetsminus current liabilities; measures abusiness's ability to meet its short-term obligations with its currentassets, 725

xX variable ! coefficient.322

zZero profit. See Breakeven point