CHSE Odisha Fundamentals of Management Accounting key terms

The branch of accounting that supplies managers with financial and non-financial information for planning, controlling and decision-making, rather than for reporting to outsiders. It is not governed by statutory formats.

The recording and reporting of past transactions in statutory statements for owners, creditors and regulators. It follows prescribed formats and conventions and emphasises reliability over managerial relevance.

The systematic recording and analysis of costs of materials, labour and overheads to ascertain cost per unit, value inventory and provide data for control. It is a principal source of management accounting information.

A control principle under which managers attend only to results that deviate significantly from plan, leaving routine conforming performance alone. It saves managerial time and focuses attention where corrective action is needed.

A statement showing figures for two or more periods side by side, with the absolute increase or decrease and often the percentage change. It reveals the direction and size of trends in each item.

A statement in which each item is expressed as a percentage of a common base, such as total assets for a balance sheet or net sales for an income statement. It allows comparison across firms of different size.

The study of an item over several years by expressing each year's figure as a percentage of a chosen base year, set at 100. It shows the long-run direction of performance.

The manipulation of accounts before the reporting date, for example by delaying purchases or accelerating sales, so that the statements look stronger than the underlying position. Analysts must read ratios with this risk in mind.

The computation and interpretation of relationships between financial statement items to assess profitability, liquidity, solvency and efficiency. Ratios are meaningful only when compared with prior periods, budgets or industry norms.

A measure of a firm's ability to meet short-term obligations as they fall due, typically the current ratio and the quick or acid-test ratio. Higher values suggest safety, but excessive values may indicate idle resources.

Current assets divided by current liabilities. It shows how many rupees of near-cash resources stand behind each rupee of short-term debt; a conventional benchmark is 2:1, though the ideal varies by industry.

Quick assets, that is current assets excluding stock and prepaid expenses, divided by current liabilities. It is a stricter liquidity test because it ignores inventory that may be slow to convert into cash.

An activity ratio measuring how efficiently assets are used, such as stock turnover or debtors turnover. It states the number of times a balance is converted or collected during a period.

The period from buying raw material to collecting cash from customers, made up of raw material, work-in-progress and finished goods holding periods plus the debtors collection period, less the creditors payment period.

A statement explaining the sources and applications of funds, where funds usually mean net working capital, between two balance sheet dates. It shows how long-term finance was raised and where it was deployed.

A statement classifying cash receipts and payments into operating, investing and financing activities and reconciling opening and closing cash. It explains why the cash balance changed despite the reported profit.

The principal revenue-producing activities of the enterprise, such as cash from customers and payments to suppliers and employees. Their net cash figure is the best single indicator of whether operations fund themselves.

Cash flows that change the size and composition of owners' capital and borrowings, such as issue of shares, receipt and repayment of loans, and payment of dividends. They indicate dependence on external funds.

Cash flows from acquiring and disposing of long-term assets and other investments not classed as cash equivalents. They show how much the firm is reinvesting for future capacity.

Sales revenue minus variable cost. It is the amount available first to cover fixed cost and then to provide profit, and is central to marginal costing and break-even reasoning.

Contribution expressed as a percentage of sales, also called the contribution-to-sales ratio. It shows the change in contribution from a given change in sales value and is used to compute break-even sales.

The level of sales at which total revenue equals total cost, so there is neither profit nor loss. It may be expressed in units, as fixed cost divided by contribution per unit, or in value.

The excess of actual or expected sales over break-even sales, in units or value, or as a percentage of actual sales. It measures how far sales may fall before a loss arises.

A quantified plan of action for a defined future period, expressed in money, units or hours. It converts objectives into targets against which actual performance can later be measured and corrected.

The process of establishing budgets, comparing actual results with them, analysing differences and taking corrective action. It links planning with control and depends on prompt reporting.

A budget prepared for several levels of activity, or adjusted to the actual activity achieved, by separating fixed and variable costs. It permits fair comparison when output differs from the original plan.

A budget prepared for one assumed level of activity and left unchanged whatever output is actually achieved. Comparison with actuals is meaningful only when activity is close to the planned level.

A budgeting method in which every activity must be justified afresh from a nil base each period, rather than by adjusting last year's figure. It suits discretionary costs and forces review of continuing activities.

A system that sets predetermined costs for materials, labour and overheads under expected efficient conditions, records actual costs, and analyses the differences. It supports cost control and performance evaluation.

A carefully predetermined estimate of the cost of one unit of product or service, built from quantity and price standards for each cost element. It serves as the benchmark against which actual cost is compared.

The process of splitting the difference between standard and actual cost into its causes, such as price and usage for materials or rate and efficiency for labour, so that responsibility can be assigned.

The difference between standard price and actual price of materials purchased, multiplied by the actual quantity. It is normally the responsibility of the purchasing function.

The difference between standard quantity allowed for actual output and actual quantity used, multiplied by standard price. It is usually attributed to the production function.

A technique in which only variable costs are charged to products and fixed costs are treated as period costs. It underlies contribution-based decisions such as pricing, product mix and make-or-buy.

The traditional method in which both variable and a share of fixed production overhead are charged to units of product. It is required for external inventory valuation but can distort short-run decisions.

A future cost that differs between the alternatives being considered. Costs already incurred and costs identical under every option are irrelevant and should be excluded from the decision.

A cost already incurred and unaffected by any present decision, such as the written-down value of old machinery. It is excluded from relevant costing because no choice can change it.

The contribution or benefit forgone by using a scarce resource in one way rather than its next best alternative. It is not recorded in the books but is essential in decisions under scarcity.

A system that assigns revenues and costs to individual managers according to the areas they control, and evaluates them on controllable items only. It supports accountability through cost centres, profit centres and investment centres.

A unit of an organisation headed by a manager accountable for a defined set of activities and results, classed as a cost centre, revenue centre, profit centre or investment centre according to what is measured.

A cost that a specified manager can influence materially within a given period through decisions under that manager's authority. Only such costs should be used when judging that manager's performance.

The internal price at which one division of a firm supplies goods or services to another. It affects divisional profit and therefore the measured performance of each responsibility centre.

Divisional or company profit expressed as a percentage of the capital employed in it. It is widely used to appraise investment centres but can discourage managers from accepting projects that lower the average return.

The profit of an investment centre after deducting a notional charge for the capital employed, calculated at a required rate. It avoids some dysfunctional effects of return on investment comparisons.

A costing method that assigns overheads to products on the basis of the activities that consume resources, using cost drivers rather than a single volume-based recovery rate. It improves accuracy where products differ in complexity.

Any factor that causes the cost of an activity to change, such as number of set-ups, machine hours or orders handled. Identifying the right driver is the foundation of activity-based costing.

The excess of current assets over current liabilities, representing the funds tied up in day-to-day operations. Its movement is the usual measure of funds in a funds flow statement.