Management accounting

Define accountancy

System for recording and processing financial information for planning and control.

Four flow parameters

Outpayment and inpayment; expenditure and revenue; expense and income; cost and performance.

What is a neutral expense

An expense not related to core business operations.

Types of neutral expenses

Non-operating expenses, extraordinary expenses, non-periodic expenses.

What are imputed costs

Costs not recorded in financial accounting or recorded at a different value.

Types of imputed costs

Anderskosten (different valued costs) - These are costs that exist in financial accounting, but are recorded at a different value in cost accounting, and Zusatzkosten (no accounting expense exists)- These are real economic costs that do NOT appear in financial accounting at all

Direct vs indirect costs

Direct costs can be traced to a product; indirect costs are allocated as overhead.

Responsiveness level formula

R equals percentage change in costs divided by percentage change in activity.

Fixed costs R equals 0

Total costs stay constant; unit cost decreases when output increases.

Proportional costs R equals 1

Costs change in direct proportion to output.

Material consumption inventory method

Opening stock plus inflows minus closing stock.

Material consumption retrograde method

Output quantity multiplied by standard material per unit.

Step ladder vs equation method

Step ladder allocates sequentially without feedback; equation method solves mutual allocations.

Material overhead rate

Material overhead costs divided by direct material costs times 100.

Production overhead rate

Production overhead costs divided by direct labor costs times 100.

Cost of sales method vs total cost method

CSM uses only sold goods; TCM includes all production and adjusts for inventory.

Investment vs financing

Investment uses capital to generate returns; financing raises capital.

Liquidity vs profitability conflict

Liquidity keeps cash safe but low return; profitability increases return but reduces liquidity.

Return on equity

Net income divided by equity.

Return on assets

Net income plus interest divided by total assets.

Return on sales

Operating profit divided by sales.

Capital turnover

Sales divided by operating assets.

DuPont ROI

Return on sales times capital turnover.

Payback period

Initial investment divided by annual cash inflow.

Payback limitation

Ignores time value of money and ignores cash flows after payback.

Net present value

Sum of cash flows divided by (1 plus r) to the power of time.

NPV decision rule

Accept if NPV is greater than or equal to zero.

Annuity method purpose

Converts NPV into equal annual payments.

Annuity formula

NPV times [r times (1 plus r) to the power T divided by (1 plus r to the power T minus 1)].

Internal rate of return

Discount rate where net present value equals zero.

IRR decision rule

Accept if IRR is greater than or equal to required return.

Lücke theorem

NPV equals discounted accounting profit when adjusted for imputed interest.

After tax discount rate

After tax rate equals before tax rate times (1 minus tax rate).

Cash ratio

Cash divided by short term liabilities.

Quick ratio

Cash plus receivables divided by short term liabilities.

Current ratio

Current assets divided by short term liabilities.