Chapter 1
Managerial accounting: the provision of accounting information for a company’s
internal users
Planning: the detailed formulation of action to achieve a particular end
Controlling: managerial activity of monitoring a plan’s implementation and taking
corrective action as needed
Decision making: the process of choosing among competing alternatives
Financial accounting: primarily concerned with producing information for external
users
Value chain: inbound logistics, outbound logistics, marketing and sales, service,
procurement, technology development, human resources management, developing
infrastructure
Continuous improvement: the continual search for ways to increase the overall
efficiency and productivity of activities by reducing waste, increasing quality, and
managing costs
Total quality management: philosophy in which manufacturers strive to create an
environment that will enable workers to manufacture perfect products
Lean accounting: organized costs according to the value chain and collects both
financial and nonfinancial information
Line positions: positions that have direct responsibility for the basic objectives of an
organization
Staff positions: positions that are supportive in nature and have only indirect
responsibility for an organization’s basic objectives
Controller: chief accounting officer, supervises all accounting functions and reports
directly to the general manager and chief operating officer
Treasurer: is responsibility for the finance function
Sarbanes-Oxley Act (SOX): established stronger government control and regulation of
public companies in the U.S.
Publicly traded companies: issue shares traded on the U.S. stock exchange
Ethical behaviour: involves choosing actions that are right, proper, and just
Certified Management Accountants (CMA) and Certified General Accountants
(CGA): have established ethical standards for accountants
Chartered Accountant (CA): education program that focuses on external financial
reports and, in particular, auditing functions
Chapter 2
Cost: the amount of cash or cash equivalents sacrificed for goods and/or services that are
expected to bring a current or future benefit to the organization Expenses: expired costs
Price: revenue per unit
Accumulating cost: the way that costs are measured and recorded
Assigning cost: the way that a cost is linked to some cost object
Cost object: any item such as a product, customer, department, project, geographic
region, plant, and so on, for which costs are measured and assigned
Committed fixed costs: can be avoided
Discretionary fixed costs: can be modified
Direct costs: those costs that can be easily and accurately traced to a cost object
Indirect costs: costs that cannot be easily and accurately traced to a cost object
Allocation: an indirect cost is assigned to a cost object using a reasonable and convenient
method
Indirect
Direct costs
costs
Direct
Allocation
Tracing
cost cost
object object
Variable cost: on that increases in total as output increases and decreases in total as
output decreases
Fixed cost: a cost that does not increase in total as output increases and decrease in total
in input decrease
Opportunity cost: the benefit given up or sacrificed when on alternative is chosen over
anther
Products: goods produced by converting raw materials through the use of labour and
indirect manufacturing resources, such as manufacturing plant, land, and machinery
Services: tasks or activities performed for a customer or and activity performed by a
customer using an organization’s products of facilities
Manufacturing organizations: organizations that produce products
Service organization: organizations that provide services
Product (manufacturing) costs: those costs, both direct and indirect, of producing a
product in a manufacturing firm or of acquiring a product in a merchandising firm and
preparing it for sale o Direct materials: those materials that are part of the final product and can be
directly traced to the foods being produced
o Direct labour: the labour that can be directly traced to the foods being produced
o Manufacturing overhead: all product costs other that direct materials and direct
labour
Prime cost: the sum of direct material cost and direct labour cost
Conversion cost: the sum of direct labour cost and manufacturing overhead cost
Period costs: all costs that are not product costs
costs
period product
capitalize inventory
asset asset
depreciation period COGS
expense expense
Selling costs: those costs necessary to market, distribute, and service a product of service
Administrative costs: all costs associated with research, development, and general
administration of the organization that cannot reasonably be assigned to either selling or
production
Manufacturing costs: total of:
o Direct material cost: the cost of any material that is an integral part of the
finished product
o Direct labour cost: the wages of employees who are integral to the finished
product
o Factory overhead costs: costs other than direct materials cost and direct labour
cost that are incurred in the manufacturing process
Materials inventory: consist of the costs of the direct and indirect materials that have not
entered the manufacturing process
Work in process inventory (WIP): consists of the direct materials, direct labour, and
factory overhead costs for products that have entered the manufacturing process but are
not yet completed Finished goods inventory: consists of completed products that have not been sold
Cost of goods manufactured: the total cost of making products that are available for sale
during the period
Cost of goods sold: determined by subtracting the ending finished foods inventory from
the cost of finished foods available for sale
Beginning inventory + Purchases - Direct materials = Ending inventory
value of materials used in production of materials
Gross margin: the difference between sales revenue and cost of goods sold
Gross margin %: gross margin / sales revenue
Operating income %: operating income / sales revenue
Chapter 3
Cost behaviour: the general term for describing whether a cost changes when the level
of output changes
Cost driver: a casual measurement that causes costs to change
Relevant range: the range or output over which the assumed cost relationship is valid for
the normal operations of a firm
Fixed costs: costs that in total are constant within the relevant range as the level of output
increases or decreases
Discretionary fixed costs: fixed costs that can be changed or avoided relatively easily at
management discretion
Committed fixed costs: fixed costs that cannot be easily changed
Variable costs: costs that in total vary in direct proportion to changes in output within
the relevant range
Total Variable costs = Variable rate X Amount of output
Total costs Is fixed throughout the
Variable Cost Varies in direct proportion to relevan range
Fixed Cost changes in activity Varies inversely with changes
Remains fixed through the in activity throughout the
relevan range relevant range
Mixed costs: costs that have both a fixed and a variable component
Total cost = Total fixed cost + Total variable cost
Step cost: displays a constant level of cost for a range of output and then jumps to a
higher level of cost at some point, where it remains for a similar range or output
Total cost = Fixed costs + (Variable rate X Output) Dependent variable: a variable whose value depends on the value of another variable
Independent variable: a variable that measures output and that explains changes in the
cost or other dependent variable
Intercept: corresponds to fixed cost (point at which the cost line intercepts the cost
(vertical) axis)
Slope: corresponds to the variable rate (the variable cost per unit of output);it is the slope
of the cost line
Variable rate =
Fixed costs = Total cost a high (low) point – (Variable rate X Output at high (low) point)
Scattergraph method: a way to see the cost relationship by plotting the data points on a
graph
Variable rate =
Method of least squares (regression): a statistical way to find the best-fitting line
through a set of data points
Chapter 4
Break-even point: the point where total revenue equals total cost
Contribution margin income statement: income statement format that is based on the
separation of costs into fixed and variable components
Contribution margin: the excess of sales over variable costs
Contribution margin = sales – variable costs
Contribution margin ratio: the percentage of each sales dollar available to cover fixed
costs and to provide the percentage of each sales dollar available to cover fixed costs and
to provide income from operations
Contribution margin ratio = contribution margin / sales
Change in income = Change in sales x Contribution margin
from operations dollars ratio
Unit contribution margin: for analysing the profit potential of proposed decisions
Unit contribution margin = sales price per unit – Variable cost per unit
Change in income = Change in sales x Unit contribution
from operations units margin Operating income = Total variable expenses – Total fixed expenses
Operating income = (Price x Number of units sold) – (Variable cost per unit x number of
units sold) – total Fixed cost
Break-even units = total fixed cost / (Price – Variable cost per unit)
Variable cost ratio: the proportion of each sales dollar that must be used to cover
variable costs
Operating income = Sales – Total variable expenses – Total fixed expenses
Break-even sales = total fixed expenses / contribution margin ratio
BE: (P x Q) = Q X VCU + FC + O P = selling price per unit
P x Q – Q x VCU = FC Q = quantity
Q (P – VCU) = FC P(Q) = total revenue
QCM = FC VCU = variable cost per unit
Q = FC / CM VC(Q) = total variable cost
FC = total fixed costs
Operating income = (Price x Units sold) – (unit variable cost x units sold) – Fixed cost
# of units to earn target income = (fixed costs + target income) / (price – variable cost per
unit)
Sales dollars to earn target income = (Fixed cost + Target income) / (Contribution margin
ratio)
Target sales – variable expenses – fixed expenses = (target income after tax)/(1-tax rate)
BE = (FC + NI/(1-T)/CM
Profit-volume graph: visually portrays the relationship between profits and units sold
Cost-volume-profit graph: depicts the relationship among cost, volume, and profits by
plotting the total revenue line and the total cost line on a graph
Revenue = Price x Units
Total cost = (units variable cost x units) + fixed cost
Direct fixed expenses: those fixed costs that can be traced to each segment and would be
avoided if the segment did not exist
Common fixed expenses: fixed costs that are not traceable to the segments and would
remain even if one of the segments was eliminated Mulching mower break- even units = fixed cost / (price - unit variable cost)
Riding mower break-even units = fixed cost / (price – unit variable cost)
Sale mix: the relative combination of products being sold by a firm
Margin of safety units: Actual sales in units – Break-even sales in units
Margin of safety in dollars: Actual sales in $ - Break-even sales in $
Margin of safety % : Margin of safety in units / Actual unit sales
MS = (sales – sales at BEP) / Sales
Operating leverage: the use of fixed costs to extract higher percentage changes in profits
as sales activity changes
Margin in safety units x Price = Margin of safety in sales revenue
Degree of operation leverage (DOL): can be measured for a given level of sales by
taking the ratio of contribution margin to operating income
Degree of operating leverage = Contribution margin / operating income
Percentage change in operating income = DOL x percent change in sales
Indifference point: quantity at which two systems produce the same operating income
equation of the two systems equal and solving for the number of unit
Chapter 5
Process-costing system: unit costs are computed by dividing the process costs for the
given period by the output of the period
Process Costing
Job-order
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