Accounting Principles Exam 2

managerial accounting

Provide useful information to the internal users
of an organization to help them make sound business
decisions

fixed cost

Does not change with changes in
volume of activity

variable cost

changes in proportion to changes in volume of activity

mixed cost

a combination of fixed and variable costs

direct cost

traceable to a single cost object

indirect cost

not easily traced to a single cost object

product costs

included in the cost of inventory, “capitalized”

period costs

costs that are expensed

direct material costs

expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods

direct labor costs

wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods

indirect labor costs

costs of other workers on the assembly line who assist direct laborers

factory overhead costs

cannot be separately or readily traced to finished goods

prime costs

expenditures directly associated with the manufacture of finished goods

conversion costs

expenditures incurred in the process of converting raw materials to finished goods

4 parts of manufacturing statement

direct materials, direct labor, overhead, computation of costs of goods manufactured

job lot

when a job involves producing more than one unit of a custom product

job order cost accounting system

determine the cost of producing each job or job lot

step wise costs

a step pattern, fixed within a “relevant range” but if the volume increases beyond the range total cost increases by a lump sum amount

estimated line of cost behavior

drawn to reflect the relation between cost and unit volume

contribution margin per unit

the amount by which a product’s unit selling price > its total variable cost per unit

contribution margin ratio

percent of a unit’s selling price > its total variable cost per unit

break even point

computing the sales level at which a company neither earns an income or incurs a loss

margin of safety

the excess of expected sales > the break even sales level

sensitivity analysis

a way to predict the outcome of a strategic decision if we changed: sales price per unit, variable costs per unit, volume, fixed costs

budgeting

the process of planning future business actions and expressing them as formal plans

budgetary control process

management’s use of budgets to see that planned objectives are met

master budget

a formal, comprehensive plan for a company’s future

master budget components

sales, purchases, various expenses, capital expenditures, cash

sales budget

show planned sales units and the expected dollars from these sales

selling expense budget

a plan listing the types and amounts of selling expenses expected during the budgeting period

capital expenditures budget

lists dollar amount to be received from plant asset disposals and spent to purchase additional plant assets

the cash budget

shows expected cash inflows and outflows during the budgeting period

budgeted income statement

summarize the income effects of the master budget, shows the predicted amount of sales and expenses for the budget period

budgeted balance sheet

summarize the company’s financial position at the end of the budget period

budgetary control

management’s use of budgets to monitor and control a company’s operations

fixed budget

based on one predicted sales or other activity measure

fixed budget performance report

compares actual results with the results expected under a fixed budget

flexible budget

based on more than one predicted sales or other activity measure

standard costs

predicted costs for delivering a product or service under normal conditions

management by exception

managers focus attention on the most significant differences between actuals costs and standard costs

cost variance

the difference between actual and standard costs

standard overhead costs

amount of overhead costs budgeted to occur at a specific activity level

incremental cost

additional costs incurred if a company pursues a certain course of action

incremental revenue

additional revenue generated by selecting a certain course of action over another

sunk cost

arises from a past decision and cannot be avoided or changed, irrelevant to future decisions

out of pocket cost

requires a future outlay of cash, relevant to future decisions

opportunity cost

the potential benefit lost by taking a specific action when two or more alternative choices are available

capital budgeting

the process of analyzing alternative long term investments and deciding whihc assets to acquire or sell

effective rate

the rate at which money grows per year

annuity

a series of cash flows (either receipts or payments) of the same dollar amount

capital expenditures budget

management’s plan for acquiring and selling plant assets

time value of money

dollar today is worth more than a dollar tomorrow

net cash flow

cash inflows - cash outflows

payback period

the expected time period to recover the initial investment amount

cost of capital

the rate the company must pay to its long term creditors and shareholders

cost of capital

the rate the company must pay to its long term creditors and shareholders

internal rate of return

the rate that results in a NPV of zero for an investment