Management Accounting and Quantitative Methods

Vocabulary flashcards covering key management accounting principles, budgeting, cost classification, ethics, statistical formulas, and investment appraisal techniques.

Depreciation (Cost Relevance)

An irrelevant cost in decision-making because it is not a cash expense.

Inventory Valuations (Marginal vs. Absorption Costing)

Lower under marginal costing than absorption costing, because inventory is valued at marginal cost as opposed to full cost.

Cost of Sales

Calculated as: opening inventory + purchases - closing inventory.

Production Budget Formula

Calculated as: sales - opening inventory + closing inventory.

Flexible Budgets vs. Fixed Budgets

Flexible budgets are good for control, whereas fixed budgets are good for planning.

Cash Budget Purpose

To anticipate cash shortages or surpluses.

Budget

A quantified formal plan expressed in aggregate terms.

Standard

A benchmark or target expressed in unit terms.

Efficiency Variance

A variance based on the time taken for actual production; lower production than budgeted does not necessarily mean less efficient.

Standard Costing Limitations

Less useful in modern environments because achieving a standard is no longer seen as acceptable, and it places emphasis on labour variance even though modern production is largely automated.

Integrated Accounting System

A system where no reconciliation is needed, no duplication of effort occurs, and financial and management figures are the same, though it may not provide the quality of information needed by management accountants.

WIP Control Account

An account that should carry standard cost; any variances must be adjusted accordingly to maintain standard cost.

Job Card

A cost record produced after a job is completed, using actual costs but absorbed overheads.

Cumulative Frequency Plotting

Plotted against the upper class boundary on an ogive.

CIMA

The Chartered Institute of Management Accountants, established in 1919; recognized as the largest professional body of management accountants in the world.

Management Accountant Organizational Positions

Three structural positions: business partner, shared service centre, and outsourcing centre.

Global Management Accounting Principles (GMAPs)

Four principles: 1. Communication provides INFLUENTIAL insight; 2. Information is RELEVANT; 3. Impact on VALUE is analysed; 4. Stewardship builds TRUST.

Cost Classification Bases

The four ways to classify costs: nature, function, behaviour, and responsibility.

Environmental Costs

Four categories of environmental costs: environmental prevention, environmental appraisal, environmental internal failure, and environmental external failure.

CIMA Code of Ethics

Five fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.

Strategic Information

Information for strategic managers that is unstructured, externally focused, highly summarised, uses estimates, and is forward looking.

Tactical / Management Information

Routine reports (e.g., budgets and productivity measures) that are slightly summarised and internally generated.

Operational Information

Information that is detailed, structured, numerical, and derived from historical internal sources.

Payback Period

An appraisal method serving as a simple measure of risk; does not consider the time value of money, is not an absolute measure, and does not ensure the maximisation of shareholder wealth.

Net Present Value (NPV)

An appraisal technique that is an absolute measure, considers the time value of money, and ensures the maximisation of shareholder wealth.

Internal Rate of Return (IRR)

A discounted cash flow appraisal technique that considers the time value of money and ensures the maximisation of shareholder wealth, but is not an absolute measure.

Balanced Scorecard

A strategic management framework focusing on vision and strategy across four perspectives: Financial, Customer, Internal business processes, and Learning and growth.

National Insurance Cost Classification

Direct cost for direct workers; indirect cost for indirect workers.

Overtime Premium Cost Classification

An indirect cost, unless worked specifically for a particular job.

Bonus Cost Classification

An indirect cost, unless awarded specifically for a particular job.

National Insurance Double Entry

Debit wages control account, credit NI control account.

PAYE Double Entry

Debit wages control account, credit PAYE control account.

Regression Slope ($b$)

The slope coefficient in linear regression, calculated as $b = \frac{n\sum xy - (\sum x)(\sum y)}{n\sum x^2 - (\sum x)^2}$.

Regression Intercept ($a$)

The intercept in linear regression, calculated as $a = \bar{y} - b\bar{x}$ (mean of $y$ minus $b$ times mean of $x$).

Correlation Coefficient ($r$)

A measure of linear correlation calculated as $r = \frac{n(\sum xy) - (\sum x)(\sum y)}{\sqrt{[n\sum x^2 - (\sum x)^2][n\sum y^2 - (\sum y)^2]}}$.

Break-Even Point (BEP)

The sales volume in units where total revenue equals total cost, calculated as $\frac{\text{Total Fixed Costs}}{\text{CPU}}$.

Break-Even Sales Revenue (BSR)

The sales revenue required to break even, calculated as $\frac{\text{Total Fixed Costs}}{\text{C/S}}$.

Return on Capital Employed (ROCE)

Calculated as $\left(\frac{\text{Net Profit}}{\text{Capital Employed}}\right) \times 100$ or $\text{Asset Turnover} \times \text{Net Profit Margin}$.

Asset Turnover

An efficiency ratio calculated as $\frac{\text{Sales}}{\text{Capital Employed}}$.

Residual Income

Calculated as: net profit - notional interest charge.

Mean for Grouped Data

Calculated as $\bar{x} = \frac{\sum fx}{n}$.

Mode for Grouped Data

Estimated graphically by drawing the cross on the modal bar of a histogram.

Median for Grouped Data

Estimated by finding the median rank ($n/2$) and reading the corresponding value from an ogive (cumulative frequency curve).

Coefficient of Variation

Calculated as $\frac{\text{s.d.}}{\bar{x}}$; a higher coefficient indicates greater dispersion.

Z-score

A standardized measure calculated as $z = \frac{x - \mu}{\sigma}$.

Cumulative Discount Factor

Annuity factor calculated as $\frac{1}{r}\left(1 - \frac{1}{(1+r)^n}\right)$.

Perpetuity Factor

The discount factor for an indefinite stream of cash flows, calculated as $\frac{1}{r}$.

Equivalent Annual Interest Rate (EIR)

Calculated using the equation $EIR = (1+r)^n - 1$.

Internal Rate of Return Formula

Linear interpolation formula calculated as $IRR = L + \left(\frac{NPV_L}{NPV_L - NPV_H}\right)(H - L)$.

IRR for Constant Return

Calculated when expecting a constant return for the foreseeable future as $\left(\frac{\text{Annual Return}}{\text{Initial Investment}}\right) \times 100$.

Normal distribution features

Never touches horizontal axis, completely described by mean and variance, symmetrical and bell-shaped

Budget manual includes

org chart, budget timetable, copies of budget forms, key assumptions to be used in budget

flexible vs flexed budget

flexible done before, shows costs at different outputs. Flexed done after, shows what actual output should have cost according to standard

Calculating cost with foregone cost

Cost of producing item + foregone profit of producing alternative item

Gross profit

sales cost - total production cost (including production overheads, excluding any selling expenses etc.)

Arrears

Payments made at the end of each period (of loan, not just interest) - need to undiscount to work out how much they should be // present value = annuity factor * annual repayment

Reducing staff turnover in balanced scorecard

internal business processes (not learning and growth) - think about actual aim not cause of that aim

Number of units can be used to absorb overheads

But only if units are identical

Characteristics of good info

Accurate, Complete, Cost beneficial, Understandable, Relevant, Authoritative, Timely, Easy to understand

Purpose of budget

communication, co-ordination, control - not cost reduction!

Functional budgets

Prepared for specific function (marketing, material cost, sales) - not cash!

Job costing appropriate for:

single special order, for relatively short period

budget manual

produced at start of budget process

Control account

records total cost as opposed to individual

Integrated accounts if under-absorption

spent more than is recorded, so have to debit P&L, credit production OH as not enough has been taken out. Doesn’t go through WIP as WIP has already received some OHs.