CHSE Odisha Fundamentals of Management Accounting flashcards

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

Management accounting definition

The process of identifying, measuring, analysing and communicating financial and non-financial information to internal managers so they can plan, control and decide. It is not bound by statutory formats.

Cost accounting vs management accounting

Cost accounting ascertains and records costs of products and services. Management accounting uses cost and other data, interprets it and reports to management for planning and decision making.

Management accounting limitations

It relies on accounting records containing estimates, ignores qualitative factors to some extent, is costly to install, and cannot replace managerial judgement in decisions.

Percentage change formula

In comparative statements, percentage change equals current year amount minus base year amount, divided by base year amount, multiplied by one hundred.

Common-size income statement

A statement in which every item is expressed as a percentage of net sales, allowing comparison across years and across firms of different sizes.

Trend percentage

A technique that fixes a base year at one hundred and expresses later years as later year amount divided by base year amount, multiplied by one hundred.

Current ratio

Current assets divided by current liabilities. It measures short-term liquidity and the margin of safety available to short-term creditors.

Quick ratio

Current assets less inventory and prepaid expenses, divided by current liabilities. It tests liquidity using only the most readily realisable current assets.

Debt-equity ratio

Long-term debt divided by shareholders' funds. It measures financial leverage and the relative claim of outsiders against owners' capital.

Return on capital employed

Earnings before interest and tax divided by capital employed, usually total assets less current liabilities. It measures operating profitability of funds invested.

Du Pont analysis

Return on equity decomposed into net profit margin, asset turnover and equity multiplier, separating profitability, efficiency and leverage effects on owner returns.

Funds from operations

Net profit adjusted for non-fund and non-operating items already debited or credited, such as depreciation added back and non-operating income deducted.

Sources of funds

In funds flow, items that increase net working capital: funds from operations, issue of shares or debentures, long-term loans and sale of fixed assets.

Cash flow statement classification

Cash flows are grouped into operating, investing and financing activities. Operating covers core revenue transactions, investing long-term assets, financing capital and borrowings.

Cash equivalents

Short-term, highly liquid investments convertible into known cash amounts, with original maturity of three months or less and insignificant risk of value change.

P/V ratio

Contribution divided by sales, expressed as a percentage. It shows the proportion of each sales rupee available to cover fixed cost and yield profit.

Break-even point

The sales volume or value at which total contribution equals fixed cost and profit is zero, computed as fixed cost divided by contribution per unit or P/V ratio.

Margin of safety

Actual or budgeted sales minus break-even sales. It measures how far sales may fall before losses begin, and also equals profit divided by P/V ratio.

Composite break-even

Break-even for a multi-product firm, computed using the weighted average P/V ratio or overall contribution per unit derived from the planned sales mix.

Flexible budget

A budget recast at the actual level of activity achieved, so that variable costs reflect actual volume and comparison with actual cost isolates genuine variances.

Zero-base budgeting

A budgeting approach in which every activity and its expenditure must be justified from nil each period, rather than starting from the previous period's figures.

Production budget units

Budgeted sales units plus desired closing finished goods units minus opening finished goods units. It sets the volume that production must achieve in the period.

Master budget

The consolidated summary of all functional budgets, comprising the budgeted income statement, budgeted balance sheet and cash budget for the period.

Material price variance

Standard price minus actual price, multiplied by actual quantity purchased. It is favourable when the actual price paid is below the standard price.

Labour efficiency variance

Standard hours for actual output minus actual hours worked, multiplied by standard rate. It measures productivity against the allowed standard time.

Fixed overhead volume variance

Budgeted fixed overhead minus fixed overhead absorbed on actual output, or budgeted hours minus standard hours for actual output multiplied by the standard rate.

Sales volume variance

Budgeted quantity minus actual quantity sold, multiplied by standard contribution or standard profit per unit. It values the effect of selling a different volume.

Marginal costing

A costing method that values inventory at variable cost only and writes off fixed production cost as a period charge against contribution earned.

Relevant cost

A future, incremental, cash-related cost that differs between alternatives. Sunk costs and allocated common fixed costs are excluded from the decision.

Opportunity cost

The contribution or benefit forgone by using a scarce resource in one course of action instead of its next best alternative use.

Key factor ranking

When a scarce resource limits output, products are ranked by contribution per unit of the scarce factor, not by contribution per unit of product.

Residual income

Divisional profit minus the required rate of return multiplied by divisional investment. It charges divisional profit with the cost of capital employed.

Investment centre

A responsibility centre whose manager is accountable for profit and for the assets employed, evaluated through return on investment or residual income.