Management Accounting and Costing Principles Flashcards

Comprehensive vocabulary flashcards generated from CIMA P1 Study Text, covering management accounting definitions, costing methods, variance analysis, budgeting, decision-making, and risk management concepts.

Management Accounting

The application of accounting and financial management principles to create, protect, preserve, and increase value for stakeholders in public and private sector enterprises.

Cost Accounting

A sub-set of management accounting focused on gathering cost information, attaching it to cost objects, establishing budgets and standard costs, and analyzing variances and profitability.

Operational Decisions

Day-to-day resource management decisions made primarily by low-level managers regarding staff, machines, and materials.

Tactical Decisions

Medium-term decisions made by middle-level managers concerning areas such as staff training, recruitment, supplier changes, and machine purchases.

Strategic Decisions

Long-term decisions made by top-level management regarding fundamental organizational direction, such as launching new products or entering new markets.

Financial Accounting

The classification and recording of monetary transactions of an entity to produce statutory financial statements for external stakeholders.

Planning

The management accounting function of establishing organizational objectives and goals and formulating long-term strategies and budgets to achieve them.

Control

The process of monitoring, measuring, evaluating, and correcting actual operating results against budgeted plans.

CGMA Cost Transformation Model

A strategic framework consisting of six organizational changes designed to help businesses achieve and maintain cost competitiveness.

Cost Unit

A unit of product or service in relation to which costs are ascertained and measured for control purposes.

Cost Centre

A production or service location, function, activity, or item of equipment for which costs are accumulated.

Cost Object

Any product, service, centre, activity, customer, or distribution channel in relation to which costs are ascertained.

Fixed Cost

A cost incurred for an accounting period that, within certain output or turnover limits, remains unaffected by fluctuations in activity levels.

Stepped Fixed Cost

A cost that remains constant within a relevant range of activity but increases to a higher constant level once a critical activity threshold is crossed.

Variable Cost

A cost that varies in direct proportion with changes in a measure of activity.

Semi-Variable Cost

A hybrid cost containing both fixed and variable components, thus partly affected by changes in activity levels.

Prime Cost

The total sum of all direct costs, including direct materials, direct labour, and direct expenses.

Product Costs

Costs associated with manufacturing items that are only incurred if production takes place, such as direct materials, direct labour, and absorbed production overheads.

Period Costs

Costs incurred due to the passage of time rather than production volume, such as rent, rates, insurance, and executive salaries.

Absorption Costing

A traditional costing method that attributes all direct production costs and absorbed fixed production overheads to determine full production cost per unit.

Overhead Allocation

The process of charging an indirect production cost directly and in full to a specific cost centre or department.

Overhead Apportionment

The process of sharing indirect production overhead costs across direct production departments on a fair and systematic basis.

Overhead Absorption

The process of adding allocated and apportioned production overheads to product or service costs using an absorption rate.

Overhead Absorption Rate (OAR)

A predetermined rate used to charge overhead costs to production units, calculated as $\frac{\text{Total Budgeted Overhead Cost}}{\text{Budgeted Production Volume}}$.

Marginal Costing

A costing method that charges products or services with variable costs alone, treating fixed costs as period costs written off against total contribution.

Marginal Cost

The extra cost arising as a result of producing one more unit, or the cost saved as a result of producing one less unit.

Contribution

The difference between sales revenue and total variable costs, calculated as $\text{Sales} - \text{Variable Costs}$.

Full Cost-Plus Pricing

A pricing method where the selling price is determined by adding a profit mark-up percentage to the full cost per unit.

Marginal Cost-Plus Pricing

A pricing method where a mark-up percentage is added to marginal cost per unit to cover both fixed costs and desired profit.

Activity-Based Costing (ABC)

An alternative approach to absorption costing that assigns overheads to cost pools before absorbing them into products using cost drivers.

Cost Pool

An activity or process that consumes resources and for which overhead costs are identified and allocated.

Cost Driver

A factor or unit of activity that causes or influences the level of costs in an activity pool.

Transaction Drivers

Cost drivers where resource consumption is driven by the frequency or number of times an action is performed.

Duration Drivers

Cost drivers where resource consumption is driven by the length of time required to perform an action.

Intensity Drivers

Cost drivers that directly measure or weight the specific resources consumed during a complex activity.

Joint Products

Two or more main products produced simultaneously by the same process and separated at a split-off point, each having a significant saleable value.

By-Product

An incidental secondary output produced during the manufacture of a main product, having a minor saleable value.

Split-Off Point

The specific stage in a joint production process where individual joint products and by-products become separately identifiable.

Throughput Accounting

A short-term decision-making system focusing on maximizing throughput contribution while minimizing inventory and operating expenses.

Throughput Contribution

The financial return generated from sales revenue less totally variable costs, defined as $\text{Revenue} - \text{Direct Material Costs}$.

Total Factory Costs (TFC)

All factory manufacturing costs excluding direct material costs, treating direct labour and overheads as fixed conversion costs.

Throughput Accounting Ratio (TPAR)

A performance measure calculated as $\frac{\text{Return per Factory Hour}}{\text{Cost per Factory Hour}}$.

Standard Costing

A control technique establishing predetermined estimates of costs and revenues and comparing them with actual results to calculate variances.

Attainable Standards

Targets based on efficient operating conditions that include realistic allowances for normal material losses and machine breakdowns.

Basic Standards

Long-term, unchanged standards left intact over years solely to monitor historical trends.

Current Standards

Standards based on current temporary or abnormal working conditions.

Ideal Standards

Targets based on perfect operating conditions with zero waste, scrap, or idle time.

Variance Analysis

The process of evaluating organizational performance by comparing actual financial results with standard or budgeted figures.

Sales Price Variance

The difference between actual sales revenue achieved and actual sales volume valued at the standard selling price.

Sales Volume Variance

The difference between actual sales volume and budgeted sales volume, valued at standard profit or standard contribution per unit.

Direct Material Price Variance

The difference between standard purchase price per unit of material and actual purchase price, multiplied by the actual quantity purchased or used.

Direct Material Usage Variance

The difference between standard material quantity allowed for actual output and actual quantity used, multiplied by standard purchase price.

Direct Labour Rate Variance

The difference between standard labour rate per hour and actual rate paid, multiplied by actual hours paid.

Direct Labour Efficiency Variance

The difference between standard labour hours specified for actual production and actual hours worked, multiplied by standard hourly rate.

Idle Time Variance

An adverse variance reflecting the standard cost of unproductive hours when paid hours exceed active hours worked.

Fixed Overhead Expenditure Variance

The difference between budgeted fixed production overhead expenditure and actual fixed production overhead expenditure incurred.

Fixed Overhead Volume Variance

The difference between budgeted production output and actual production output, multiplied by standard fixed overhead absorption rate per unit.

Sales Mix Variance

The variance resulting from selling a different proportion of individual products than the standard budgeted mix.

Sales Quantity Variance

The variance measuring the profit or contribution effect of selling a different total quantity of units than budgeted at the standard mix.

Planning Variance

The portion of a total variance caused by an inaccurate original standard when compared against a realistic ex-post standard.

Operational Variance

The portion of a total variance calculated by comparing actual operating performance against a revised, realistic ex-post standard.

Principal Budget Factor

The key resource or factor that restricts the activity level of an organization for a budget period.

Master Budget

The consolidated financial plan for an organization, comprising the budgeted statement of profit or loss, cash budget, and budgeted balance sheet.

Rolling Budget

A continuous budget updated regularly by adding a further accounting period when the earliest completed period expires.

Incremental Budgeting

A traditional budgeting method taking the previous period's budget or actuals and adjusting for expected inflation and activity changes.

Zero-Based Budgeting (ZBB)

A budgeting method where all activities are re-evaluated and justified from a zero base each time a budget is formulated.

Activity-Based Budgeting (ABB)

A budgeting system utilizing an activity framework and cost driver rates to determine budgeted resource needs.

Beyond Budgeting

A performance management model advocating moving away from traditional annual budgets toward dynamic rolling forecasts and relative targets.

High-Low Method

A technique for separating semi-variable costs into fixed and variable components using the highest and lowest activity levels and costs.

Linear Regression Analysis

A statistical method used to estimate the linear equation ($y = a + bx$) describing the relationship between a dependent and an independent variable.

Coefficient of Determination ($r^2$)

A statistical metric measuring the proportion of total variation in a dependent variable that is explained by the independent variable in a regression model.

Time Series Analysis

A quantitative technique that analyzes historical data recorded over regular time intervals to identify underlying trends and seasonal variations.

Feedback Control

A control system that compares actual results achieved against planned targets after operations occur to take corrective action for future periods.

Feedforward Control

A control system that compares expected future forecast outcomes against targets before the event to implement preventive action.

Flexible Budget

A budget designed to adjust or 'flex' cost allowances according to the actual level of activity achieved.

Controllable Costs

Costs that can be directly influenced or managed by a designated budget holder within a specific timeframe.

Uncontrollable Costs

Costs that cannot be influenced or altered by a specific manager through operational actions.

Sunk Cost

A past, irrecoverable cost already incurred or committed that cannot be affected by future decisions.

Opportunity Cost

The value of the financial benefit or contribution forgone by selecting one course of action over the best alternative.

Shadow Price

The maximum premium over normal cost that an entity should be willing to pay to acquire one additional unit of a limiting scarce resource.

Limiting Factor

A restricted resource that limits the production capacity or profitability of an organization in the short term.

Break-Even Point

The level of sales volume or revenue where total revenues equal total costs, resulting in zero profit.

Margin of Safety

The difference between budgeted or actual sales volume and the break-even sales volume, expressed in units or percentage.

Contribution to Sales (C/S) Ratio

The proportion of sales revenue that remains as contribution to cover fixed costs and profit, calculated as $\frac{\text{Contribution}}{\text{Sales}}$.

Operational Gearing

The degree to which an organization's cost structure is composed of fixed costs relative to variable costs.

Expected Value (EV)

The weighted average outcome calculated by multiplying each possible future payoff by its associated probability, expressed as $\text{EV} = \sum p x$.

Maximax Rule

An optimistic decision rule that selects the option offering the highest possible maximum payoff.

Maximin Rule

A pessimistic decision rule that selects the option offering the highest possible minimum payoff.

Minimax Regret Rule

A decision rule that selects the option that minimizes the maximum possible regret or opportunity loss.

Value of Perfect Information

The maximum amount a decision-maker should pay for a 100% accurate forecast, calculated as $\text{EV with Perfect Information} - \text{EV without Information}$.