ICAG Paper 1.4 Cost & Management Accounting flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Cost object

Any activity, product, service, department or customer for which a separate measurement of cost is required. It determines what costs are collected and how they are assigned.

Prime cost

The total of direct materials, direct labour and direct expenses. It excludes all production overhead and is the first block in building up the full production cost of a product.

Conversion cost

The sum of direct labour and production overhead incurred to convert raw materials into finished output. It is used in process costing to value equivalent units of work done.

High-low method

Technique separating mixed cost into fixed and variable elements using the highest and lowest activity levels. Variable rate equals the change in cost divided by the change in activity.

Relevant range

The band of activity over which the assumed fixed cost total and variable cost per unit remain valid. Outside it, step-fixed costs and efficiency changes break the cost behaviour assumptions.

Overhead absorption rate

Budgeted production overhead divided by a budgeted activity base such as labour hours, machine hours or units. It allocates indirect cost to products using a predetermined basis.

Job costing

A costing method where costs are collected for each separately identifiable job or customer order. It suits bespoke, low-volume production such as construction, printing or custom machinery.

Batch costing

A costing method treating a group of identical units produced together as one cost unit. Unit cost equals total batch cost divided by the number of good units in the batch.

Notional profit

In contract costing, the value of work certified plus work in progress less costs incurred to date. It is the basis for deciding how much contract profit to recognise prudently.

Normal loss

Expected, unavoidable process loss expressed as a percentage of input. It is valued at scrap value only, so its cost is absorbed by the good output of the process.

Abnormal gain

Output exceeding the expected level after allowing for normal loss. It is valued at full cost per good unit and credited to the process account and to profit.

Equivalent units

A conversion of partly finished output into the number of fully complete units it represents. Used in process costing to spread costs fairly across completed and closing work in progress.

Marginal costing

A costing system valuing inventory at variable production cost only. Fixed production overhead is treated as a period cost, so profit moves directly with sales volume.

Absorption costing

A costing system including fixed production overhead in product cost. Profit differs from marginal costing by the change in inventory multiplied by the fixed overhead absorption rate.

Flexed budget

A budget restated for the actual activity level achieved using standard variable cost per unit. Fixed costs remain at budget, allowing fair comparison of actual and expected cost.

Material price variance

Standard price minus actual price, multiplied by actual quantity purchased. A positive figure is favourable; it is usually the purchasing manager's responsibility and is measured at point of purchase.

Labour efficiency variance

Standard hours for actual output minus actual hours worked, multiplied by standard rate. It measures productivity against the standard allowance and is normally the production manager's responsibility.

Fixed overhead volume variance

Budgeted hours minus standard hours for actual output, multiplied by the standard fixed overhead rate. It splits into capacity and efficiency components under absorption costing.

Sales volume variance

Actual units sold minus budgeted units, multiplied by standard contribution per unit under marginal costing, or standard profit per unit under absorption costing.

Operating statement

A report reconciling budgeted profit to actual profit by listing favourable and adverse variances in order. It explains the causes of the difference rather than just stating it.

Relevant cost

A future, incremental cash flow that differs between the alternatives being considered. Sunk costs, committed costs and non-cash book values are excluded from the decision.

Opportunity cost

The contribution or benefit forgone from the next best alternative use of a scarce resource. It is a relevant cost even though no cash is paid for it.

Limiting factor ranking

Rank products by contribution per unit of the scarce resource, not by contribution per unit. This maximises total contribution when a single resource constrains output.

Shut-down decision

A segment is closed only if its contribution is less than the specific fixed costs avoided by closing. Unavoidable allocated fixed costs are irrelevant to the decision.

Throughput accounting

A technique measuring throughput as sales less material cost, ranking products by throughput per unit of bottleneck time. It focuses improvement effort on the binding constraint.

Return on investment

Controllable divisional profit divided by capital employed, expressed as a percentage. It links profit to the assets used but can discourage managers from accepting profitable projects.

Residual income

Controllable profit less an imputed interest charge on capital employed. It encourages investment-centre managers to accept projects earning above the cost of capital.

Balanced scorecard

A performance framework using financial, customer, internal process, and learning and growth perspectives. It links measures to strategy and balances lagging with leading indicators.

Minimum transfer price

Variable cost of the transferred unit plus the opportunity cost of transferring it internally. Where spare capacity exists, opportunity cost is nil and the minimum equals variable cost.

Responsibility centre

A unit of an organisation whose manager is accountable for defined outputs: cost, revenue, profit or investment centre. Controllable items only should be used to judge the manager.

Goal congruence

The condition where individual managers' objectives align with those of the organisation. Budgets, performance measures and incentives are designed to encourage congruent behaviour.

Variance investigation rule

Investigate a variance when the expected benefit of correcting the cause exceeds the cost of investigation. Control limits and standard error help separate random from systematic variation.