ICSAN Management Accounting key terms

A future cash cost or saving that differs between the alternatives being compared. Sunk costs, committed costs and apportioned fixed overheads are excluded because they do not change with the decision.

The contribution or benefit forgone by using a scarce resource for one purpose instead of its next best alternative. It is included in decision analysis even though no cash payment appears in the ledger.

Money already spent or irrevocably committed that cannot be recovered whatever decision is taken. It is irrelevant to forward-looking choices, though it may still influence reported profit.

Sales revenue less all variable costs, measured per unit or in total. It shows how much each sale adds towards covering fixed costs and then generating profit.

The activity level at which total contribution exactly equals total fixed costs, giving neither profit nor loss. It can be expressed in units, in revenue or as a percentage of capacity.

The amount by which budgeted or actual sales exceed the break-even volume, shown in units, revenue or percentage terms. It measures how far sales can fall before a loss arises.

A technique that models how changes in volume, selling price, variable cost and fixed cost affect profit. It typically assumes linear costs and a single product or constant sales mix.

A product costing method that assigns both variable and a share of fixed production overhead to units produced. It is required for external financial reporting in most jurisdictions.

A costing approach in which inventory and product cost carry only variable production costs, with fixed costs written off in full against the period's contribution. It supports short-term decisions and profit-volume analysis.

A predetermined rate used to charge indirect production costs to products, usually calculated as budgeted overhead divided by budgeted activity such as labour hours or machine hours.

The difference between overhead actually incurred and overhead charged to production using a predetermined rate. Over-absorption means too much was charged; under-absorption means too little.

The factor that causes a cost to change in total, such as machine hours, number of set-ups or number of orders. Identifying a suitable driver is central to activity-based costing.

A method that assigns overhead to products through activities and their cost drivers rather than a single volume-based rate. It improves accuracy where products consume support activities in different proportions.

A costing method where costs are collected separately for each identifiable unit or small batch to customer specification. It suits bespoke work such as construction, printing or professional services.

A costing method that treats a group of identical units produced together as the cost object, with the unit cost found by dividing batch cost by batch size. It suits production runs of similar items.

A form of job costing applied to large, long-duration projects such as building or civil engineering work. Revenue and profit are recognised by stage of completion using work certified and retention.

A costing method for continuous mass production of identical units, where total costs are averaged over output. Normal losses, abnormal gains and losses and equivalent units must be handled.

A measure converting partly completed work into the number of fully complete units it represents, based on the degree of completion of each cost element. It allows work in progress to be valued in process costing.

The unavoidable waste or spoilage expected under efficient operating conditions, whose scrap value is credited to the process account. Its cost is absorbed by good output.

Loss in excess of the expected normal level, valued at full cost and written off to the profit and loss account rather than borne by good output. An abnormal gain is the reverse.

One of two or more products of broadly similar value produced unavoidably from the same process up to the split-off point. Common costs are apportioned using sales value or physical measures.

A minor product arising incidentally from a process, of much lower value than the main product. Its net realisable value is usually deducted from the main process cost.

A predetermined estimate of the cost of a product or operation under specified working conditions, built from price and usage standards. It provides the benchmark against which actual performance is compared.

The process of comparing actual results with budgeted or standard figures, identifying the causes of differences and reporting them to management for action.

A difference from standard that increases profit relative to budget, such as actual cost being below standard or actual revenue above standard. Adverse variance is the opposite.

A unit of output expressed as the time it should take to produce it at standard efficiency. It allows output of different products to be combined in a single capacity measure.

A budget that is adjusted to the actual activity level achieved, so that fixed and variable costs are compared on a like-for-like basis. It isolates spending variances from volume effects.

A budget prepared for one planned level of activity and not adjusted afterwards. Comparing it directly with actual results at a different volume mixes volume effects with spending effects.

A budgeting approach where each activity must justify its entire budget from a nil base rather than from last year's figure. It challenges existing spending but is time-consuming to operate.

Preparing next period's budget by adjusting the current period's figures for expected changes such as inflation or growth. It is quick but tends to perpetuate past inefficiencies.

The cycle of setting budgets, communicating them, measuring actual performance and taking corrective action on significant variances. It links planning with day-to-day operational management.

A unit of an organisation whose manager is accountable for a defined set of revenues, costs or investments. It may be a cost, revenue, profit or investment centre.

A divisional performance measure calculated as divisional profit divided by divisional capital employed. It encourages efficient asset use but can cause managers to reject projects that dilute the ratio.

Divisional profit less a notional interest charge on the capital employed by the division. Unlike return on investment, it should not discourage managers from accepting profitable projects.

The period between paying suppliers for materials and collecting cash from customers, covering inventory holding, production, receivables and payables days. Shortening it releases cash.

The order size that minimises the combined cost of placing orders and holding inventory. It balances ordering costs against holding costs, assuming stable demand and known lead times.

The sum of a project's future cash flows discounted to present value at the cost of capital, less the initial outlay. A positive figure suggests the project adds value.

The discount rate at which a project's net present value is zero. It is compared with the cost of capital to decide acceptance, but can mislead with non-conventional cash flows.

The time taken for cumulative cash inflows to recover the initial investment. It is simple and favours liquidity, but ignores cash flows after the cut-off and the time value of money.

A family of appraisal techniques that convert future cash flows to present value using a discount rate reflecting the time value of money and risk. Net present value and internal rate of return are examples.