ICSAN Management Accounting flashcards

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

Prime cost

The sum of direct materials, direct labour and direct expenses incurred in producing a product or service. It excludes production overheads.

Conversion cost

The cost of converting raw materials into finished goods, comprising direct labour plus production overheads. It excludes direct material cost.

High-low method

A technique that estimates the variable rate as the change in cost divided by the change in activity between the highest and lowest activity levels, then derives fixed cost.

Relevant range

The band of activity over which assumed cost behaviour (fixed costs constant, variable cost per unit constant) is valid. Estimates outside it are unreliable.

Job costing

A costing method that accumulates direct materials, direct labour and absorbed overhead for each separately identifiable job on a job cost card.

Equivalent units

A measure converting partially completed work into the equivalent number of fully completed units, used to apportion process costs between completed output and work in progress.

Abnormal loss

Loss above the normal expected level, valued at the normal cost per good unit and written off to profit or loss rather than treated as product cost.

By-product

A product with minor sales value arising incidentally from a process; its net realisable value is credited against the main process cost.

Material price variance

The difference between standard and actual material price multiplied by actual quantity purchased or used. A positive value is favourable.

Labour efficiency variance

The difference between standard hours for actual output and actual hours worked, multiplied by the standard labour rate.

Fixed overhead volume variance

The difference between budgeted hours and standard hours for actual output, multiplied by the standard fixed overhead absorption rate per hour.

Operating statement

A report reconciling budgeted profit to actual profit by listing favourable and adverse variances for sales, materials, labour and overheads.

Absorption costing

A costing method that includes a share of fixed production overhead in product cost, so inventory is valued at full production cost.

Marginal costing

A costing method that values inventory at variable production cost only and treats fixed production overhead as a period cost.

Over-absorption

The amount by which overhead absorbed into production exceeds actual overhead incurred, arising when actual activity or spending differs from budget.

Contribution per unit

Selling price minus variable cost per unit. It measures the amount each unit contributes towards covering fixed costs and generating profit.

Break-even point

The activity level at which total revenue equals total cost, giving zero profit. In units it equals fixed costs divided by contribution per unit.

Margin of safety

The excess of budgeted or actual sales over break-even sales, expressed in units or as a percentage of budgeted sales.

Operating gearing

Contribution divided by profit. A higher ratio means profit is more sensitive to changes in sales volume because fixed costs are proportionately larger.

Zero-based budgeting

A budgeting approach in which every activity and cost must be justified from a zero base each period, rather than adjusting prior-year figures incrementally.

Flexed budget

The original budget restated for the actual level of activity achieved, used as a fair benchmark for comparing actual costs.

Rolling budget

A budget continuously updated by adding a new period as the current period expires, so the planning horizon remains constant.

Learning curve

A model in which cumulative average time per unit falls by a constant percentage each time cumulative output doubles, reflecting improved efficiency.

Relevant cost

A future incremental cash flow that differs between alternatives. Sunk costs, committed costs and non-cash items are excluded from decisions.

Opportunity cost

The contribution or benefit forgone by choosing one alternative over the next best use of a scarce resource; it is a relevant cost.

Limiting factor analysis

Ranking products by contribution per unit of scarce resource and producing in rank order to maximise total contribution when a resource is constrained.

Residual income

Divisional profit minus an imputed interest charge on divisional investment. It encourages managers to accept projects earning above the cost of capital.

Balanced Scorecard

A performance framework combining financial, customer, internal business process, and learning and growth perspectives to give a balanced view.

Economic order quantity

The order quantity that minimises total inventory ordering and holding costs, calculated as the square root of twice annual demand times order cost divided by holding cost.

Cash conversion cycle

Inventory days plus receivable days minus payable days. It measures the period between paying suppliers and collecting cash from customers.

Net present value

The present value of a project's cash inflows minus its initial investment, discounted at the cost of capital. A positive NPV indicates acceptance.

Profitability index

The present value of cash inflows divided by the initial investment. It ranks projects under capital rationing when funds are limited.

Activity-based costing

A costing method that assigns overheads to products through activities and cost drivers, improving accuracy where overheads are large and products diverse.

Target costing

A pricing-led approach where target cost equals competitive selling price minus required profit margin; any cost gap must be closed through design and process improvement.