Management Accounting week 1 and 2

Management Accounting

The process of measuring, analyzing, and reporting financial and non-financial information that assists management in the formulation and implementation of an organization's strategy.

Cost

A resource sacrificed or given up to achieve a specific objective, incurred when a company uses a resource for the production of a good or service.

Cost Object

Any activity, product, service, project, customer, department, or organizational unit for which a separate measure of cost is desired.

Scorekeeping

The primary function of management accounting that involves measuring, analyzing, and reporting financial and non-financial data for inventory valuation, profit measurement, and internal and external reporting.

Attention Directing

The management accounting function of providing information for planning, controlling, continuous improvement, and evaluating operational performance across responsibility centres.

Problem Solving

The management accounting function focused on non-routine decision making, comparing relevant future costs and revenues across alternatives to achieve organizational goals.

Relevant Costs and Revenues

Future costs and revenues that will change or differ among alternative courses of action as a result of a decision.

Irrelevant Costs and Revenues

Costs and revenues that will not change or differ regardless of which alternative decision is selected.

Responsibility Centres

Organizational units classified into Cost Centres, Revenue Centres, Profit Centres, and Investment Centres to assign controllable costs and revenues for managerial performance evaluation.

Cost Accumulation

The collection and grouping of cost data in an organized manner by way of an accounting system under various categories.

Cost Assignment

A general term that encompasses both tracing direct costs to a specific cost object and allocating indirect costs to that cost object.

Direct Costs

Costs that relate to a particular cost object and can be traced to it in an economically feasible manner, such as Direct Materials and Direct Labour.

Indirect Costs (Overheads)

Costs that relate to a cost object but cannot be traced to it in an economically feasible or cost-effective manner, such as plant electricity or plant supervisor salaries.

Cost Tracing

The assignment of direct costs to a specific cost object using traceable source documents like Materials Requisition Forms and Labour Time Sheets.

Cost Allocation

The process of assigning indirect costs (overheads) to a specific cost object when direct tracing is not economically feasible.

Prime Cost

The sum of all direct manufacturing costs, calculated as $\text{Prime Cost} = \text{Direct Materials} + \text{Direct Labour}$.

Conversion Cost

The total cost required to convert raw materials into finished products, calculated as $\text{Conversion Cost} = \text{Direct Labour} + \text{Manufacturing Overheads}$.

Variable Costs

Costs that change in total in direct proportion to changes in output or activity level, while remaining constant on a per-unit basis.

Fixed Costs

Costs that remain constant in total over wide ranges of activity within the relevant range, but change inversely per unit as output changes.

Mixed Cost (Semi-variable Cost)

A cost containing both a fixed component that remains constant regardless of activity and a variable component that changes directly with volume.

Step Cost (Semi-fixed Cost)

A cost that remains fixed within specified activity levels, but increases or decreases by a constant amount at critical activity thresholds.

Product Costs (Inventoriable Costs)

Costs identified with goods purchased or manufactured for resale, recorded as assets in inventory until sold and then expensed as Cost of Goods Sold.

Period Costs

Costs not included in inventory valuation that are treated as expenses in the accounting period in which they are incurred, such as non-manufacturing selling and administrative expenses.

Unexpired Costs

Costs recorded as assets on the Balance Sheet (inventoried) that are later charged to the Income Statement when the product is sold.

Expired Costs

Costs that have been consumed or used up and are charged directly as expenses in the current period Income Statement.

Statement of Cost of Goods Manufactured

A financial schedule that calculates the total manufacturing costs incurred during a period plus beginning Work-in-Process inventory minus ending Work-in-Process inventory.

Financial Accounting

The branch of accounting focused on communicating financial position and past financial performance to external users like investors, banks, and regulators in compliance with GAAP.

Relevance Lost

A term popularized by Johnson and Kaplan's $1987$ book highlighting the growing gap between traditional academic accounting teaching and contemporary business practice.

Supply Push Approach

A traditional manufacturing process characterized by high volume, long production runs, and significant levels of work-in-process and finished goods inventory.

Demand Pull Approach

A contemporary lean manufacturing approach focusing on low volume, short production runs, and minimizing inventory levels and non-value-added activities.

Value Chain

The sequential set of business functions in which customer usefulness is added to a product or service, consisting of R&D, Design, Production, Marketing, Distribution, and Customer Service.

Supply Chain

The production and distribution portions of the value chain that describe the flow of goods, services, and information from initial material sourcing to final consumer delivery.

Key Success Factors (KSFs)

Strategic indicators used to evaluate value and supply chain performance: Cost & efficiency, Quality, Time, Innovation, and Sustainability.

Benchmarking

The process of using information about past internal operations or leading competitors' performance to track key success factors and continuously improve operations.

Cost Leadership Strategy

A competitive strategy identified by Michael E. Porter where an organization aims to outperform competitors by producing goods or services at the lowest possible cost.

Product Differentiation Strategy

A competitive strategy where an organization offers unique or innovative products or services that customers value and are willing to pay a premium for.

Decision-Making Process

A five-step sequence: $1.$ Identify the problem/uncertainties, $2.$ Obtain information, $3.$ Make predictions about the future, $4.$ Make decisions by choosing among alternatives, and $5.$ Implement the decision, evaluate performance and learn.

Balanced Scorecard (BSC)

An accounting report that addresses an organization's performance across four perspectives: Financial, Customer, Internal processes, and Learning & growth.

Strategy Map

A visual method based on the Balanced Scorecard that links its four perspectives in a cause-and-effect diagram to illustrate strategy implementation.

Target Costing

A cost management technique for competitive markets where maximum allowable cost is calculated as $\text{Target Cost} = \text{Market-determined Price} - \text{Desired Profit}$.

Life-Cycle Costing

A method where costs are monitored and tracked throughout a product's entire life cycle, from research and development to customer service.

Total Quality Management (TQM)

A technique by which management develops policies and practices to ensure products and services achieve zero defects and exceed customer expectations.

Theory of Constraints (TOC)

A management approach that helps firms improve cycle time by identifying bottlenecks in converting raw materials into finished products.

Sarbanes-Oxley Act 2002

Legislation passed in $2002$ in response to corporate scandals, focusing on improving internal controls, corporate governance, monitoring of managers, and public company disclosures.

IMA Standard of Competence

The ethical requirement that management accountants perform professional duties in accordance with relevant laws, regulations, and technical standards while maintaining professional expertise.

IMA Standard of Confidentiality

The ethical requirement that management accountants refrain from disclosing confidential information unless authorized or legally bound to do so, and refrain from using confidential information for unethical advantage.

IMA Standard of Credibility

The ethical requirement that management accountants report information fairly and objectively, disclosing all relevant information expected to influence an intended user's understanding.

IMA Standard of Integrity

The ethical requirement that management accountants carry out duties ethically, mitigate conflicts of interest, refuse improper gifts or favors, and communicate both favorable and unfavorable information.