Management Accounting

Costing

Estimations of the costs and revenues associated with producing a particular product or performing a particular service

Variable costs

Vary according to the volume of activity

Fixed costs

Remain constant when changes occur to the volume of activity

Marginal analysis

that compares the extra costs with the extra benefits of producing or doing one more unit of something to find optimal resource allocation and maximize profits

Full costing

The sum of all costs for a product or a service until it has been delivered to a customer and paid for

Direct costs

Costs that can be directly tied to particular products

Indirect costs (overheads)

All costs that cannot be directly assigned to particular products

An investment project

Is a cash outlay that generates economic benefits (net cash flows) in the future

Payback Period (PP)

Time taken for initial investment to be repaid out of project net cash inflows

Terminal value

the value of a current amount at a future point in time

Present Value

The value today of a future amount to be received

Internal Rate of Return (IRR)

The discount rate, which, when applied to future project cash flows, produces a zero NPV

Sensitivity analysis

A technique showing how variations in key assumptions impact financial outcomes

Scenario analysis

Creating case-scenarios (best, worst) to see the impact on financial outcomes

Operating gearing

measures how sensitive a company’s operating profit is to change in sales, based on its mix of fixed and variable costs

Profit-volume chart (PV)

obtained by plotting profit or loss against volume of activity, with the slope being contribution per unit

Full Costing

the total amount of resources, usually measured in monetary terms, sacrificed to achieve a given objective.