Prelims 1

Managerial accounting

Branch of accounting that focuses on providing relevant, timely, and useful financial and non-financial information to internal users.

Internal use only

Information is prepared exclusively for management and is not disclosed to external parties.

Future-oriented (Predictive focus)

Emphasizes budgeting, forecasting, and planning rather than just recording past transactions.

Flexible reporting structure

Reports are not bound by strict accounting standards; they are customized based on management needs.

Costing and cost analysis

This involves identifying, classifying, and evaluating costs to support managerial planning and control.

Cost-Volume-Profit

Determines break-even points and assess the impact of changes in cost, volume, and profit.

Budgeting

It involves preparing operational, financial, cash, and capital budgets to guide business activities.

Forecasting

Estimates future revenues, costs, and resource needs.

Variance analysis

Compares actual results with budgets to evaluate performance and support corrective actions.

Balanced scorecard

Used to measure financial and non-financial performance.

Strategic management accounting

Supports long term planning and competitive advantage.

Involves analyzing market trends, competitor behavior, and value chain activities.

Assists in pricing strategies and product mix decisions.

Financial statement analysis

Interpreting financial performance using ratio analysis and other analytical tools.

Capital budgeting

Assessing long-term investment decisions involving fixed assets and strategic projects.

Financial accounting

Focuses on preparing general-purpose financial reports for external users.

Cost accounting

Focuses on measuring and controlling the costs of operations.

Intended for external stakeholders, such as investors and creditors.

FA’s users of information

Intended mainly for management and operational departments.

CA’s user of information

MA - future-oriented decisions

FA - historical financial results

CA - cost analysis and control

Focus of MA, FA, and CA

MA - includes budgeting, forecasting, and performance evaluation

FA - overall financial condition

CA - product, process, and operational costs

Scope of MA, FA, and CA

MA - not governed by mandatory external standards

FA - required to comply with IFRS/PFRS and regulatory rules

CA - internal costing method with no strict external standards

Reporting standards of MA, FA, and CA

MA - present and future

FA - past

CA - past and current costs

Time orientation of MA, FA, and CA

MA - as needed by management

FA - periodically

CO - regularly for cost monitoring

Frequency of reporting of MA, FA, and CA

MA - confidential and internally used

FA - often publicly disclosed

CA - internal and confidential

Confidentiality of MA, FA, and CA

Cost

The monetary value of resources sacrificed or used to achieve a particular purpose.

Cost pool

A collection or grouping of similar costs accumulated for a specific activity before being allocated to cost objects.

(ex: factory overhead or administrative overhead accounts)

Cost object

Any item, activity, department, product, service, job, or process for which costs are measured and assigned.

Cost driver

A factor or activity that causes changes in the costs of an activity.

It serves as basis for allocating costs because it has direct cause-and-effect relationship with the incurred cost.

Cost behavior

It describes how costs change in response to changes in the level of activity or cost driver.

Cost function

An algebraic equation that expresses the relationship between total cost and the related cost driver.

Used to estimate costs at different activity levels.

Activity

Any event, operation, transaction, or work process that consumes resources and generates costs in producing goods or delivering services.

Direct cost

Cost that can be specifically and conveniently traced to a particular object, department, product, or activity.

Easily identifiable and measurable.

Indirect cost

Cost that cannot be easily or economically traced to a specific cost object.

(ex: factory rent, salaries of security personnel, utilities shared by several dept.)

Controllable cost

Cost that can be significantly influenced or regulated by manager within a given period.

(departmental supplies, overtime costs, electricity usage within dept)

Uncontrollable cost

Cost that a manager cannot significantly influence or control.

Imposed by higher management or allocated from other dept.

(allocated head office expenses, property taxes, insurance allocated to dept)

Manufacturing cost

Costs incurred in converting raw materials into finished goods.

Direct materials

Direct labor

Manufacturing overhead

Three major elements of manufacturing costs

Direct materials

Raw materials that become an integral part of the finished product and can be directly traced to it.

(wood used in furniture manufacturing)

Direct labor

Labor costs of employees who directly work on the product during the manufacturing process.

(wages of assembly line workers)

Manufacturing overhead

All manufacturing costs other than direct materials and labor.

Includes indirect materials, indirect labor, and other factory-related expenses.

(factory rent, factory equipment depreciation, and factory utilities)

Prime cost

Refers to the total of direct materials and direct labor.

Conversion cost

Refers to the cost incurred in transforming raw materials into finished goods.

Non manufacturing costs

Costs incurred outside the production process.

Commonly referred to as operating expenses.

Selling costs

Costs incurred in marketing, promoting, and delivering products to customers.

(advertising expenses, sales commissions, and delivery expenses)

Administrative costs

Costs related to overall administration and management of the organization.

(office salaries, legal and accounting fees, and office supplies)

Product cost

Also known as inventoriable costs, attached to goods purchased or manufactured and remain in inventory until sold.

Once sold, these become part of COGS.

Period cost

Charged as expenses in the period in which they are incurred because they are not directly related to production.

Differential cost

Also called incremental cost, is the difference between two or more decision alternatives.

Standard cost

A predetermined or estimated cost based on expected operating conditions, historical data, or industry standards.

Opportunity cost

Refers to the benefit sacrificed when one alternative is chosen over another.

(building for production instead of renting it out)

Sunk cost

Past cost that has already been incurred and cannot be changed by future decisions.

(purchase cost of equipment, past research and development costs)

Out-of-pocket cost

Involves future cash flows resulting from a business decision or activity.

(cash payments for materials and wages to be paid)

Fixed costs

Remain constant in total regardless of changes in activity within the relevant range.

(rent, depreciation, salaries of administrative staff)

Variable costs

Change in direct proportion to activity level.

Total cost increases or decreases as volume changes.

(direct materials, direct labor, sales commissions)

Mixed (Semi-variable) costs

Contains both fixed and variable components.

Fixed portion remains constant, while the variable portion changes with activity.

(utility bills with fixed service charge plus usage charges)

Committed fixed costs

Long-term fixed costs arising from an organization’s basic operating capacity and structural commitments.

Typically difficult to reduce or eliminate in the short run without affecting core operations.

(property taxes)

Discretionary fixed costs

Fixed costs that arise from management decisions regarding periodic spending on certain activities.

Unlike committed costs, they are flexible and can be adjusted or eliminated in the short run.

(research and development expenditures)

High-low method

A cost estimation technique used to separate mixed costs into their fixed and variable components.

It involves identifying the highest and lowest activity levels and comparing the corresponding total costs at these two points.

Relevant costs

Costs that differ between alternative courses of action and are expected to occur in the future.

Irrelevant costs

Costs that do not change regardless of the alternative selected and therefore have no impact on decision outcomes.