AAT Level 3 - Management Accounting - MMAC

Cost unit

Unit of output to which costs can be charged.

Cost centre

Segment of business to which costs can be charged.

Costs by element

1. Materials

2. Labour

3. Expenses

Costs by nature

1. Direct

2. Indirect

Costs by function

1. Production

2. Non-production (administration, selling and distribution, finance)

Costs by behaviour

1. Fixed

2. Variable

3. Semi-variable

Prime cost

Total of all direct costs.

Product cost

Costs that become part of manufactured product.

Period costs

Costs that cannot be assigned to manufactured product and are incurred in a period of time.

Economic order quantity

Square root of 2 x annual usage x ordering cost / inventory holding cost.

Responsibility centre

Segment of business for which manager is accountable.

Overhead absorption rate

Budgeted cost centre overheads divided by planned work in cost centre, which is then applied to actual work done.

Over-absorption

Overheads absorbed are more than spend on overheads.

Under-absorption

Overheads absorbed are less than spend on overheads.

Marginal cost

Cost of producing one extra unit of output, defined as direct costs and variable production overheads.

Absorption cost

Period production costs of business are absorbed amongst cost units through use of an overhead absorption rate. Defined as direct costs and variable and fixed production overheads.

Budget

A financial plan for a business prepared in advance.

High-low method

Identifies amounts of fixed and variable costs where total costs are known at two levels of output.

Contribution

Selling price less variable cost.

Fixed budget

Remains same whatever level of activity.

Flexible budget

Changes with level of activity.

Break-even units

Fixed costs divided by contribution per unit.

Break-even sales revenue

Break-even point in units multiplied by selling price per unit. Or break-even point divided by profit-volume ratio.

Margin of safety

Current output less break-even output divided by current output times 100.

Target profit units

Fixed costs plus target profit divided by contribution per unit.

Profit-volume ratio

Contribution divided by selling price.

Limiting factor

Maximise contribution per unit of limiting factor.

Special order pricing

Using spare capacity to make extra sales of product at above marginal cost but below absorption cost.

Capital investment appraisal

Enables business to make decisions as to whether to invest in a capital investment project.

Payback

Period of time for initial cost of capital investment to be repaid from net cash inflows.

Net present value

Value of cash outflows and inflows for a project discounted to present day amounts.

Internal rate of return

Rate of return at which net present value of cash inflows equals cost of initial investment.