Managerial Accounting - Prelims

Managerial Accounting

A branch of accounting that focuses on providing relevant, timely, and useful financial and non-financial information to internal users. Forward-looking, flexible, and decision-oriented. Process of identifying, measuring, analyzing, interpreting, and communicating financial and non-financial information to support internal management.

Costing and Cost Analysis

Identifying, classifying, and evaluating costs. Cost-Volume-Profit (CVP) analysis.

Budgeting and Forecasting

Planning and controlling organizational resources. Preparing operational, financial, cash, and capital budgets. Forecasting estimates future revenues, costs, and resource needs. Variance analysis compares actual results with budgets.

Performance Measurement and Evaluation

Assesses organizational and managerial performance using Key Performance Indicators (KPIs) and responsibility accounting.

Decision-Making Support

Providing relevant cost and financial information. Used for short-term decisions. Long-term investment decisions.

Strategic Management Accounting

Long-term planning and competitive advantage. Analyzing market trends, competitor behavior, and value chain activities.

Internal Control and Risk Management Support

Ensures efficient use of resources and effective internal controls.

Decision-Making

Provides relevant data.

Planning

Assists in setting objectives.

Directing Operational Activities

Supports managers.

Controlling

Enables monitoring of performance.

Cost Classification and Reporting

Classifying. Financial statements.

Cost Allocation and Pricing Decisions

Activity-Based Costing (ABC).

Cost Behavior and Cost-Volume-Profit (CVP) Analysis

Cost-Volume-Profit relationships.

Performance Evaluation Using Cost Data

Product costing and variable costing methods.

Relevant and Differential Cost Analysis

Revenues and costs.

Standard Costing and Variance Analysis

Operational efficiency.

Budgeting and Planning

Short-term budgets to guide operations and resource allocation.

Responsibility Accounting and Transfer Pricing

Performance measurement and internal pricing systems.

Capital Budgeting

Long-term investment decisions. Fixed assets and strategic projects.

Cost

The monetary value of resources sacrificed or used.

Cost Pool

A collection or grouping of similar costs.

Cost Object

Any item, activity, department, product, service, job, or process.

Cost Driver

Causes changes in the total cost of an activity. Basis for allocating costs. Direct cause-and-effect relationship.

Cost Behavior

Costs change in response to changes in the level of activity or cost driver. Fixed, variable, or mixed.

Cost Function

An algebraic equation. Total cost and the related cost driver.

Activity

Consumes resources and generates costs.

Relevant Range

Normal operating range. Assumptions about cost behavior remain valid.

Direct Cost

Specifically and conveniently traced. Direct materials used in manufacturing. Salaries of workers directly involved in production. Materials used exclusively for a specific project.

Indirect Cost

Cannot be easily or economically traced. Factory rent. Utilities shared by several departments. Salaries of security personnel.

Controllable Cost

Influenced or regulated. Managers are generally held accountable. Departmental supplies. Electricity usage within a department. Overtime labor costs.

Uncontrollable Cost

Cannot significantly influence or control. Imposed by higher management. Allocated head office expenses. Insurance allocated to departments. Property taxes.

Manufacturing Costs

Converting raw materials into finished goods.

Direct Materials

Integral part of the finished product. Traced.

Direct Labor

Labor. Directly work on the product during the manufacturing process.

Manufacturing Overhead

All manufacturing costs other than direct materials and direct labor.

Prime Cost

Total of direct materials and direct labor.

Conversion Cost

Costs incurred in transforming raw materials into finished goods.

Nonmanufacturing Costs

Outside the production process. Operating expenses.

Selling Costs

Marketing, promoting, and delivering.

Administrative Costs

Overall administration and management.

Product Cost

Inventoriable costs. Cost of Goods Sold (COGS). Direct materials. Direct labor. Manufacturing overhead.

Period Costs

Expenses in the period in which they are incurred. Not directly related to production. Administrative salaries. Office rent. Advertising expenses.

Differential Cost

Incremental cost. Difference in cost between two (2) or more decision alternatives.

Relevant Cost

Future cost that differs between alternatives.

Standard Cost

Predetermined or estimated cost. Expected operating conditions, historical data, or industry standards.

Opportunity Cost

Benefit sacrificed when one alternative is chosen over another.

Sunk Cost

Past cost. Cannot be changed by future decisions.

Out-of-Pocket Cost

Future cash outflows.

Fixed Costs

Remain constant. Rent, depreciation, salaries of administrative staff.

Variable Costs

Change in direct proportion to activity level. Direct materials, direct labor, sales commissions.

Mixed Costs

Both fixed and variable components. 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. Property taxes. Depreciation of facilities. Salaries of top management personnel. Lease or rental payments.

Discretionary Fixed Costs

Fixed costs that arise from management decisions regarding periodic spending on certain activities. Research and development expenditures. Advertising and promotional expenses. Employee training programs. Charitable contributions.

High-Low Method

Cost estimation technique used to separate mixed costs into their fixed and variable components based on the assumption that changes in total cost are driven solely by changes in variable cost, while fixed cost remains constant. Identifying the highest and lowest activity levels.

Relevant costs

Costs that differ between alternative courses of action and are expected to occur in the future. Directly affect the financial outcome of a choice. Direct labor, variable overhead, avoidable fixed costs, and opportunity costs. Potential benefit forgone when one alternative is chosen over another.

Irrelevant costs

Costs that do not change regardless of the alternative selected and therefore have no impact on decision outcomes. Sunk costs. Past expenditures that cannot be recovered. Committed fixed costs that remain unchanged within the relevant range.

Cost behavior analysis

Process of examining how costs change in relation to changes in business activities or cost drivers. Enables managers to predict future costs, prepare budgets, evaluate performance, and make effective decisions.

Cost driver

Any factor that causes a change in the cost of an activity. Units produced. Direct labor hours. Machine hours. Sales volume. Number of customers served.

Cost estimation

Process of predicting future costs for a particular activity, project, product, or operation based on historical data and expected business conditions. Determine the relationship between costs and the factors.

High-Low Method

Cost estimation technique used to separate a mixed (semi-variable) cost into its fixed and variable components. Changes in total cost are primarily caused by changes in the activity level. Helps predict future costs at different activity levels.

Scattergraph Method

Visual network tool used in accounting to separate the fixed and variable elements of a semi-variable expense (also called a mixed cost). Estimate and predict future costs. Horizontal x-axis representing a firm's production activity. Vertical y-axis representing its cost.

Regression Analysis

Set of statistical processes used to estimate the relationships between a dependent variable and one or more independent variables. The primary goal is to model the relationship between these variables to make predictions or infer causal relationships. The most common form of regression analysis is linear regression.

Account Analysis Method (AAM)

Cost estimation technique that separates mixed costs into fixed and variable components by examining and classifying individual accounts based on their behavior. Primarily depends on professional judgment.

Cost function

Mathematical relationship that shows how total costs change with changes in the level of activity or cost driver. Fixed costs. Variable costs. Activity levels.

Financial statements

Formal reports that present the financial information of an organization in a structured and systematic manner. Financial position, operating performance, and cash-generating ability. Assess an entity's profitability, liquidity, solvency, and overall financial position. Information about management stewardship.

Assets

Economic resources controlled by an entity because of past transactions or events. Resources used by the organization to conduct business operations and generate future income.

Current Assets

Expected to be realized, sold, or consumed during the entity's normal operating cycle. Within twelve months after the reporting period.

Non-Current Assets

Long-term operating.

Liabilities

Present obligations arising from past transactions or events.

Current Liabilities

Expected to be settled within a short period. Within the entity's normal operating cycle or twelve months after the reporting period.

Non-Current Liabilities

Not due for settlement within twelve months after the reporting period or within the entity's normal operating cycle.

Capital (Equity)

Residual interest or ownership claim of the owners over the assets of the business after deducting liabilities. Amount invested by owners plus accumulated profits remaining in the business.

Revenue

Gross inflow of economic benefits during an accounting period resulting from the ordinary activities of an entity. Increase in equity.

Expenses

Outflow or consumption of economic benefits incurred during business operations to generate revenue. Decrease equity.

Statement of Financial Position (Balance Sheet)

Presents the financial condition and resources of an entity at a specific point in time. Provides a snapshot of the entity's financial position. This statement helps users evaluate the entity.

Liquidity

Entity's ability to meet short-term obligations as they become due. Evaluates whether the entity has sufficient current assets to pay current liabilities.

Solvency

Entity's ability to meet long-term obligations and sustain operations over time.

Statement of Comprehensive Income

Presents the financial performance of an entity for a specific accounting period. Revenues earned and expenses incurred during the period. About how effectively management utilized the entity's resources to generate earnings.

Profitability

Ability to generate earnings.

Operational Efficiency

Measures how effectively management uses resources to generate revenue while controlling costs.

Earning Capacity

Entity's ability to generate future profits and support sustainable growth.

Statement of Changes in Equity

Specific accounting period. Explains the increases or decreases in equity resulting from profit or loss, owner contributions, distributions, and other comprehensive income. Helps users understand the changes in owners' interest and the entity's capital position.

Statement of Cash Flows

Presents the cash inflows and outflows of an entity. Helps users evaluate the entity's ability to generate cash, meet obligations, and support its operations and future growth.

Notes to the Financial Statements

Documents accompanying the numerical data listed on the financial statements.

Working Capital Management

Process of managing a company's current assets and current liabilities to maintain a balance between profitability and liquidity.

Gross Working Capital (GWC)

Total value of a company's current assets that can be converted into cash within one (1) year.

Net Working Capital

Financial metric that measures a company's short-term liquidity and operational efficiency.

Financial Statement (FS) Analysis

Process of examining, evaluating, and interpreting information presented in the financial statements to understand an entity's financial performance, financial position, and prospects. Company's past results, current financial condition, and potential for future growth. Identify important trends, evaluate business performance, and make informed economic decisions.

Horizontal analysis

Analyzing data over time, such as computing year-to-year peso and percentage changes within a set of financial statements. Each item on the most recent statement is compared with the same item on one (1) or earlier statement.

Trend analysis

An extended horizontal analysis.

Vertical analysis

Focuses on the relations among financial statements at a given point in time. Vertical analysis in which each account is expressed as a percentage. All items are expressed as a percentage of total assets and total liabilities and equity. All items are expressed as a percentage of net sales.

Ratio Analysis

Process of evaluating a company's financial performance and condition by analyzing relationships among items in its financial statements. Identifying financial strengths and weaknesses.

Liquidity Ratio

Ability of a company to convert assets into cash and meet short-term obligations.

Current Ratio

Measures the entity's ability to pay short-term obligations using its current assets.

Quick Ratio (Acid-Test Ratio)

Ability to meet current liabilities using its most liquid assets.

Asset Management Ratios

How efficiently a company uses its assets to generate revenue and profit. Validate asset utilization.

Accounts Receivable Turnover

How efficiently an entity collects its credit sales from customers.

Number of Days in Accounts Receivable

The average number of days required to collect receivables.

Average Collection Period

Average time it takes for the entity to collect cash from customers after a credit sale.