G lin dex

A Combined Glossary/Subiect

using for decision making,

B
BAII Plus calculator, 529-536 Balanced scorecard. Measures that recognize that management must consider financial performance measures and operational performance measures when judging the performance of a company and its subunits,671.-676 Balance sheets,67-68. Seealso Financial statements budgeted,554 -7 comparative,7 1.7 1.8,720 horizontal analysis of, 7 1.7-71.8 vertical analysis of,720 Benchmarking. The practice of comparing a company with other companies that are leaders, 54L-542, 670,72L-722 against industry average,722 against key competitor, 721, Blame, 563 Board of directors. The body elected by shareholders to oversee the company,T Book value per share of common stocl<.Common stockholders' equify divided by the number of shares of common stock outstanding. The recorded amount for each share of common stock outstan ding, 7 33-7 34 Breakeven point. The sales level at which operating income is zero: Total revenuesequal total expenses. affect of changes in fixed costs on, 380 affect of changesin salesprice on,377 affect of changesin variable costs on, 378 finding, using CVP analysis,

ABC. SeeActivity-based costing (ABC) Absorption costing. The costing method where products "absorb" both fixed and variable manufacturing costs,332-338

247-249 239-240 for using job costing,

(ABM). Activity-basedmanagement cost informaUsing activity-based that increase tion to make decisions profits while satisfyingcustomer's Absorption costing income statement, 247-249 needs, 334,420,421. 237 on Activity cost allocati rates, Account A for analysis. method deter- Advertising, 50 mining cost behavior that is based an Allocate.To assign indirectcostto on a manager'sjudgment in classifya cost object,54 ing each general ledger account as a Allocation base.A common denomivariable, fixed, or mixed cost, nator that links indirectcoststo cost 31,7-320 objects(suchas jobs or production Accountingrate of return (ARR). A processes). IdeallS the allocation measureof profitability computed baseis the primary costdriver of the by dividingthe average annualoperindirect cost,1,22 ating income from an assetby the Annuities. A stream of equal 471. initial investment the asset. in installmentsmade at equal time 476478,497 intervals,481 Accountsreceivable turnover.Measure future valueof, calculating a company'sability to collect cash 484-485 from credit customers. compute To present valueof, calculating accounts receivable turnover,divide 485-488 net credit sales by average net internalrate of return with, accounts eceiv r able,728 495496 Accrual accounting, 6 47 net present valuewith, 490-491' Acid-test ratio. Ratio of the sum of Appraisal costs. Costs incurred to cash plus short-term investments detect poor-quality goods or serplus net current receivables total to vices,259,260 current liabilities.Tellswhetherthe Assets entitycanpay all of its currentliabilcapital,470 ities if they come due immediately. residualvalueof, 493-494 Also calledthe quick ratio,727 return on,731 Activity-based costing(ABC).Focuses totaI,690,731 on activitiesas the fundamentalcost Assign. To attach a cost to a cost objects. The costsof thoseactivities object, 54 become building blocks for comthe of A Audit committee. subcommittee piling the indirectcostsof products, that is responthe boardof directors services, custome 238-246 and rs, both the internal siblefor overseeing productprofitability assessing audit function and the annualfinanwith,240-246 audit by CPAs. cial statement costbenefittest,249-Z 50 Averagecosts.The total cost divided development system of for, by the numberof units, 72-73 238-239 Average unit costs,183

36s-368.382-384 graphing,371. 554 Budgeted balance sheet, incomestatement, 548 Budgeted manufacturing overhead Budgeted rate.!23

G-l

G.2

Glindex

Budgeted statement cashflows, of 554-555, 556 Budgets.Quantitative expression of a plan that helpsmanagers coordinate and implementthe plan, 3. See also Capital budgeting benefits o1,540-542 capitalexpenditures, 543 cash, 551-554 employee acceptance 555-556 of, tlnancral. I-JJ6 JJ flexible,596-602 inventorSpurchases, cost of and goodssold,546-547 master, 542-545. 4, 569 operating, 545-548 operatingexpenses, 547 for planningand controlling, 539-540 rollingup unit, 557-558 sales, 545-546 sensitivity analysis fo4 556-557 static,597, 622 usesof, 539-542 using,to control operations, 558-563 Budgetvariances, 4 Business activities, valuechain, in 49-51. Business decisions. Decisions See Business environment, 18-25 Business functions,234-235 Business sectors, 47-49 Business-to-business (82B) e-commerce,21

Capital expenditures budget. A company's plan for purchasesof properry plant, equipment, and other longterm assets,543 C a p i ta l rati oni ng. C hoosi ng among alternative capital investments due to limited funds, 472,492-493 Capital turnover. The amount of sales revenue generated for every dollar of invested assets;a component of the ROI calculation computed as sales divided by total assets, 685

Committed fixed costs. Foxed cosrs that are locked in becauseof previous management decisions;management has little or no control over these costs in the short run, 306 Common-size statement. A financial statement that reports only percentages(no dollar amounts),721,722 Communication, 54L, 669 Companies, comparisons between,

720-721,

c
Capital, costof, 688 Capitalassets, 470 Capital budgeting.The processof making capital investment decisions. Companies make capital investments when rheyacquirecapital assets, assets used for a long period of time, 470-473 comparingmethodsof, 497-498 methods of,471 process, 472-473 usingaccounting rate of return, 476-478 usingdiscounted cashflow models, 488-497 usingpaybackperiod,473-476

Comparative balance sheets, 717-719,720 Cash budgets. Details how the busiComparative incomestatements, ness expects to go from the begin716-717,719 ning cash balance to the desired Competence, 12 e n d i n g bal ance. A l so cal l ed the Competition statement of budgeted cash receipts global,20 and payments,551-554 time-based, 20-23 Cash collections,budgeted,551 Competitive advantage,41.4 Cash flow models, discounted, Competitors, benchmarking 488497 against,721. Cash flows, 471472 Compound interest. Interest combudgeted statement of, 554-555, puted on the principal and all inter5 56 estearned date,481 to discounting,485-488 Confidentiality, !2 net cash inflows, 471-475, Constraints. factor that restricts A pro477478, 489, 490-492 ductionor sale a product, of 434436 Cash payments, budgeted, 552-553 Centralized decision making. Refers Continuous improvement philosophy. to companies in which all major A philosophy requiringemployees to planning and operating decisions continually look for waysto improve are made by top managemenq 666 performance ,24-25 Certified Financial Manager (CFM). Contribution margin. Sales revenue A professional certification issued minus variableexpenses, 334-335, by the IMA to designateexpertise in 362-363,379 the areas of financial statement Contributionmargin approach, to analysis, working capital policy, decision making, 41.7-41,8 capital structure, businessvaluation, Contribution rnargin income stateand risk management, 11 ments. An income statementthat Certified Management Accountant groupscostsby behavior ratherthan (cMA), 11 function;can only be usedby inter(CPAs), Certifiedpublicaccountants nal management, 326-327, 335, 7-8,1.9 362-363,420,431 Chief executive officer (CEO). The Contribution margin per unit. The positionhired by the board of direcexcess the unit sales of priceoverthe tors to oversee the companyon a variablecost per unit. Also called daily basis, 7 unit contributionmargin,363 Chief financial officer (CFO). The Contribution margin ratio. Ratio of position responsible all of the for contribution margin to sales revenue, company's financialconcerns, 7 363-365, 367-368, 369, 383-384 Chief operatingofficer (COO). The Control decisions, usingABC, 248 positionresponsible overseeing Controllable costs. Costs that cdrr v for the company's operations, 7 be influence changed manageor by Climatefor action,675-676 ment,68-69

Glindex

Controller. The position responsible for general financial accounting, managerial accounting and tax reporting,7 Controlling. One of management's primary responsibilities; evaluating the results of business operations againstthe plan and making adjustmentsto keepthe companypressing toward its goal, 3 Conversioncosts.The combination of direct labor and manufacturing overhead costs,58, 173 Coordination, 541 Corecompetencies, 414 Corporatescandals, 18 Cost allocated systems, needfor more accurate,233-237 Cost allocation. Assigningindirect 111 costs costobjects, to for activities, 243-245 Costallocation base, 135 Cost assignment. general A term that refersto both tracing direct costs and allocatingindirect coststo cost L11 objects, how costs Cost behaviors.Describes change volumechanges, as 302-31,4 determining, 31,7-326 fixed costs,306-309 high-lowmethod for, 320-322 mixedcosts, 309-311 regression analysisof, 322-325 relevantrangeand, 31,1,-31,3 stepcosts,373-31,4 variable costs, 303-306 Cost-benefit Weighingcosts analysis. againstbenefitsto help make decisions,2415 for ABC, 249-250 260:262 of quality programs, Cost centers. subunit responsible A only for controlling costs, 559, 560,669 performance reports,679 Cost distortion. Overcostingsome productswhile undercosting other products,234 Cost driver. The primary factor that causes costr122 a Costequations. mathematical A equation for a straight line that expresses how a cost behaves,304, 307, 320-326

Costing.Seealso Activity-based costing; Job costing;Process costlng absorption,332-338 just-in-time, 266:268 product,4
.

va r la Dle . 55L-JJ

it

Cost objects. Anything for which measuremanagers want a separate ment of costs,53-54 688 Costof capital, Cost of goods manufactured.The manufacturingcost of the goods that finishedthe productionprocess this period,63-64 calculationof,64-66 sold,55,63, I29-I30 Costof goods Cost of quality reports.A report that lists the costsincurred by the company relatedto qualiry The costsare categorized as prevention costs, costs,internalfailure costs, appraised 258 and externalfailurecosts, Cost per unit of output, 682 Cost-pluspricing. An approachto pricing that beginswith the product's full costsand adds a desired price, profit to determine cost-plus a 108-109,425-427 Cost predictions andr326 data concerns high-lowmethod,325 using 325 analysis, usingregression production,'1..9 6 5-19 Cost reports, Costs of, accountanalysis 31.7-320 activity,237 affectof volume on,302-31.4 allocating, 54 259,260 appraisal, 54 assigning, 72-73 averag% average unit, 183 68-69 controllable, 58,1.73 conversion, cutting,248 differential,69 direct,53-54 of,668 duplication externalfailure, 259, 260 62-68 in financialstatements. Iixed, 70-7 1, 303, 306-309, 379-381,43L432 flexiblebudget,598-600 168-L72 flow of, in costing,

flow of, through inventoryaccounts, 66-67 functionalseparation 326-327 of, indirect,53-54,234 internalfailure, 259, 260 irrelevant, 69-70, 415-41,6 labor,629 labor compensation, 58-59 manufacturing, 6-58, 7 1., 5 1.21.-1.26, 332, 611-61,2 marginal, T3 materials, 1.1.1.-1.1.4 merchandising, 55-56 1, mixed,303,309-31 37L noninventoriable, 134 54 operating, opportunity,440 121-126 overhead, per equivalent units, 1,81,1,92 period,54, 59,62-68,332,333 prevention, 258-259,260 prime,58 product,54-58, 59,62-68, 105,333 41. relevant, 69-70, 31.1.-31.3, 541.6 609-627 standard, step, 313-314 sunk,70,416 total,72-73,72-73, 180-183, 192-1.93,31,1,-313 total fixed,307 total mixed,309 total variable,304 1 transferred-in, 88 68-69 uncontrollable, unit, 183,L95 variable,70-7 1.,303-306, 31.2, 377-379 Costsof qualitS 258-262 needfor accurate, Cost systems, 233J34 directcoststo Cost tracing.Assigning L11 costobjects that used those costs, Cost variances directlabor,61.9-622 for directmaterials, 61.3-61.8 useof, 623-624 Cost-volume-profit (CVP) analysis. Expresses the relationship among volume,and profit or loss. costs, assumptions , 361-362 for changing business conditions, 376-384 components of,361. contributionmargin ratio, 363-365 datarequiredfor,36l mix on, 381-384 effectof sales

G.4

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graphingrelationships, 370-371 planningprofits wing, 368-371 sensitivity analysis with, 376-3 84 unit contributionmargin,362-363 usefulness of,360 usingto find breakeven point, 365-368 Credibility,12 Cross-functional teams. Corporate teamswhosemembers represent various functionsof the organization,8 Currentassets, 68 Current ratio. Current assets divided by currentliabilities.Measures ability to pay current liabilities with current assets, 725-727 Curvilinear costs. A cost behavior that is not linear, 3L4 Customer perspective, 672, 673-674 Customer relations,667 Customer satisfaction ratings,674 Customerservice. Supportprovided for customers after the sale.51

D
Data concernswith,326 relevant, 415-416 scatter plots of, 318-320 Days'-sales-in-receivables. Ratio of averagenet accounts receivableto one day's sale. Indicateshow many days' salesremain in Accounts Receivables waiting collection, 728-729 Debt, ability to pay long-rerm, 729-730 Debt ratio. Ratio of total liabilities to total assets. Shows the proportion of a company's assetsthat is financed with debt,729 Decentralized operations. Refers to companies that are segmented into smaller operating units; unit managers make planning and operating decisionsfor their units.666-669 advantages of,667 disadvantagesof, 668 Decision making. One of management's primary responsibilities; identifying possible courses of action and choosing among them, 4 centralized.666 cost-benefit analysis,24-25 decentralized, 666-669 full product costs for, 54

internal, 332,334 job costingand,1.07-109 by managers,4l.4-41.8 qualitative factors in, 41,7 relevantinformation for.41 5416 usingactivity-based costing, 247-249 usingcostsof quality,260-262 usingratios, 725-734 Decisions. also Invesrmenr See decisions to drop products,departments, or terntones, 430434 outsourcing, 437441 product mix,434437 regularpricing,421.-427 sellasis or process further, 441443 short-termspecial, 41.7-418, 430443 special sales order,418421 Defectrate,675 Demand, limited,and productmix, 436437 Demand-pull 257 systems, Departmental rate. Separate overhead manufacturing ratesestaboverhead lishedfor eachdepartment,236 Departments, dropping,430-434 Depreciation, 57-58,690 Design.Detailedengineering prodof ucts and services and the processes for producingthem, 50 Differential cost. The difference in costbetween two alternative courses of action,69 f)irect costs. costthat can be traced A to a costobject,53-54 priDirecting. One of management's mary responsibilities; running the companyon a day-to-day basis,3 Direct labor (DL). The cost of compensating employees who physically convert raw materials into company'sproducts;labor coststhat are directly traceableto the finished product,56, 58-59, 11,5-1,1,7 assigning,629 variances in,61.9-622 Direct materials(DM). Primaryraw materialsthat becomea physical partof a finished productand whose costsare traceable the finished to product,56 analyzingvariancesin, 613-6 18 recordinguseof,629

Discounted cash flow models, 488497,498 internal rate of return, 494-497 net present value, 489-494 Discounting,24 Discounting cash flows, 485-488 Discount rate. Management's minimum desired rate of return on an investment. Also called the hurdle rate and required rate of return,490 Discretionary fixed costs. Fixed costs that are a result of annual management decisions; fixed costs that are controllable in the short run, 306 Distribution. Delivery of products or services customers,51 to Dividend yield. Ratio of dividends per share of stock to the stock's market price per share.Tells the percentage of a stock's market value that the company returns to stockholders annually as dividends, 733

E
per Earnings share(EPS). Amount of a company'snet income for each share of its outstandingcommon stock,732 E-commerce,20,21-22 Economic value added (EVA). A residualincomemeasure calculating the amount of incomegenerated by the companyor divisions excess in of stockholders' long-termcredand itors' expectations, 687-689 Economies, shifting,19-20 Efficiency variances. Measures whether the quantityof materials labor used or to makethe actualnumberof outputs is within the standard allowedfor that numberof outputs. directlabor,620-621, direct materials, 61,7 pitfalls,622 useof, 623-624 Electronic billing, 21 Electronic commerce, 21,-22 20, Employee capabilities, 5-67 6 67 Employee compensation, 58-59 Employee performance, evaluation of, usingvariances, 623-624 Employee roles,in JIT systems, 257 Employees, acceptance budgetby of 555-556

Glindex

G.5

Enterprise resource planning (ERP) systems. Software systems that can integrate all of a company's worldwide functions, departments, and data in to a single system, 20-21,

132-133,394 Equity return on,731-732 tradingon,732 Equivalent units, 173-174, 178-180 computingoutput in termsof, 178-1,80, 190-L9'i. costper,181r1.92 Ethicaldilemmas, 1,1,-1,4 Ethics,11.-12 Expectations, communica tion of, 669 Expertknowledge, 667 Externalfailure costs.Costsincurred when the companydoesnot detect poor-qualitygoodsor services until after deliveryis madeto customers, 259,260 Externalreporting,inventoriable product costsfor, 54-55

comparative, T26 costs in, 62-68 of manufacturing companies,63-64 of merchandisingcompanies,62-63 period coveredby,714 of servicecompanies, 62 Finished goods inventory. Completed goods that have not yet been sold, 48 First-in, first-out (FIFO) method, 175 Fixed costs.Costs that do not change in total despite wide changesin volume,

of flexiblebudgetcosts, 599-600,601 plots,318-320 scatter margingrowth,673,682 Gross Grossprofit, 334-335

H
Health insurance premiums, 58 HighJow method. A method for determining cost behavior that is basedon two historical data points: the highest and lowest volume of activitv.

70-71.,303,306-309 avoidable,432
and CVP analysis, changing, 379-381, of, characteristics 308 committed,306 discretionary, 306 relevantrangesofr 312 targe\ 424 unavoidable.431432 Fixedexpense line, 370 Flexiblebudgets. summarized A budget preparedfor different levelsof volume. defined,597-598 performance using, evaluation 600-602 for planning, 598-600 useof, by managers, 596-602 Flexiblebudget variance.The differthe encearising because company more or lessrevenue actuallyearned or incurredmore or Iesscost than for expected the actuallevelof outpvt, 602-603,605-606 401(k)plans, 58 Fringebenefits, 58-59 Full product costs.The costsof all resources usedthroughoutthe value 105 for chain a product,54,55, FuturevaIue,482-485,5 19-520

320-322.325
Historical information, on costs, 317 Horizontal analysis.Study of percentage changes in comparative financial statements,7 1,6-71,8 Hurdle rate,490

I
Illegal behavior,vs. unethical behavior, 14 Income reconciling in, differences 336-337 residual, 686-687 Incomestatement approach, findto point, ing breakeven 365-366,369-370 Incomestatements. also See Financialstatements absorption costing,334, 420, 421, budgeted, 548 common-si2e,721,722 comparative,16-717, 7 1-9 7 contributionmargin,326-327, 335,362-363,420,431. horizontalanalysis , 7 1,6-7 1,7 of of manufacturing companies, 64 of merchandising companies, 62-63 operating,371. of service companies, 62 standardcost,632-633 variablecostingcontributionmargin, 335-336 verticalanalysis 71,9 of, Incremental analysis approach, 417-41.8,420441 for deciding when to seLI,441,443 for droppingproducts,431.-433 for outsourcing 438-439 decisions, Indirect costs.A cost the relatedto the costsobjectbut cannotbe traced to it. 53-54.234

F
Federal Insurance Contributions Act ( F I CA ) , 58 Fe e d b ac k3, 670 , Financial accounting, 2-3, 5-6 Financial budget. The cash budget (cash inflows and outflows), the budgeted period-end balance sheet, and the budgeted statement of cash fl o w s,543 Financial budgets, preparation of, 551- 556 Financial performance, 563 Financial performance measurement. Seealso Performance measurement cost centers, 679 investment centers, 682-69 1, limitations of , 670-671,, 689-691, profit centers, 680-682 revenue centers, 680 Financial perspective,672, 67 3 Financial statement analysis horizontal analysis,7 16-7 18 methods of.71.5 red flags rn,734 vertical analysis, 7 1,9-721, Financial statements,6. Seealso Balancesheets;Income statements

G
Generally acceptedaccounting princ i p l es(GA A P ),6 Global marketplace, 20 Goal congruence. Aligning the goals of subunit managers with the goals of top management,668,669 Goods, finished, 1.27-1.28 Graphs of CVP relationships, 370-37 1

G.6

Glindex

Indirect labor. Labor costs that are difficult to trace to specific products, 57-59.116-117 Indirect materials. Materials whose costs are difficult to trace to specific products, 57 Industry ayerag%benchmarking against,722 Inflation,326 Information nonfinancial, 417 relevant,415-416, 417 Information systems advances, 20-21 capabilities, 67 5-676 Information technology job costing and, 132-133 for sensitivity analysis, 556-557 sensitivity analysis and, 384 Inputs, standard costs of, 611,-612 Institute of Management Accountants (IMA). The professional organization that promotes the advancement of the management accounting profession,ll Insurance, 57 lntegrity,1.2 Intercept coefficient, 322 Interest co m pound, 481 si mp le, 481 Interest-coverage ratio. Ratio of income from operations to interest expense. Measure the number of times that operating income can cover interest expense.Also called the times-interestearned ration, 730 Interest rates,495 Internal audit function. The corDorate function charged with assesslng the effectiveness of the company's internal controls and risk management policies, 7-8 Internal business per spective, 67 2 )

the investment equal to zero, 471, 4 9 4 4 9 7 ,498 calculation of, 526-528, 534-536 International O ryanization f or Standardization (ISO), 23-24 International trade, 20 Internet, 20 Inventoriable product costs. All costs of a product that GAAP requires companies to treat as an asset for external financial reporting. These until the prodcosts are not expenses uct is sold, 54-59,62-68,105 Inventory recording sale and releaseof,

630-631
in traditionalproduction 255 systems, typesof, 48 Inventoryaccounts, flow of costs through,66-67 Inventoryflow assumptions, 175 Inventorg purchases, cost of and goodssold budget,546-547 Inventory turnover, Ratio of cost of goods sold to averageinventory. Indicates how rapidly inventoryis sold,727-728 Investment centers. subunitresponsiA ble for generatingprofits and efficiently managing the division's (assets), 560,669 invested capital 5 59, financialperformance 682-691 of, Investment decisions. also See Capital budgeting time valueof moneyand,481-488 usingaccounting rate of return, 476-478 usingdiscounted cashflow models, 488-497 usingpaybackperiod,473476 Investments,stock,732-7 34 Irrelevantcosts, 69-70, 415416 ISO 9001:2000 certification. 23-24

674-67s Internaldecision making,full product costsfor, 54 Internal failure costs.Costsincurred when the companydetects and corrects poor-quality goods or service beforedeliveryto customer, 259, 260 (IRR).The rate Internalrate of return of return (based discounted on cash flows) that companycan expectto earn by investingin a capital asset. The interest rate that makesNPV of

t
Job completion, accounting for, 1 2 7-128 Job costing. The system for assigning costs to a specific unit or to a small batch of product or servicesthat (1) pass through production steps as a distinct identifiable job and (2) can vary considerably in materials, labor, and overheadcosts,107-110

accounting completionand sale for of finished goods,1,27-128 accountingfor manufacturing labor.115-117 accountingfor manufacturing overhead, I2t-1.26 accounting materials, for 1,1,1,-1,14 closingmanufacturing overhead, 128-131, decision making and, 107-109 informationtechnologyfo4 132-133 in manufacturing company, 1.32-1,34 vs.process costing, 168-172 in service companies, 134-136 in, steps 110-111 job's cost,1.07-1.09 summarizing usingactivity-based costingfor, 239-240 Job cost record.The documentthat accumulated the direct materials, direct labor, and manufacturing overhead costs assignedto each job, 108,1.09,1.13, individual LL6 costs,flow of, through accounts, Job 1,09-1,1,0 allocatingmanufacturing overJobs, headto, 122-126 Journalentries in process costing,1,93-1,95 standardcost accounting systems, 628-631 (JIT) costing.A standard Just-in-time costingsystemthat startswith output completed and then assigns manufacturing costs to units sold and to inventories. Also calledbackflush costing. example of,266-268 features of,266 A Just-in-time (JIT) management. systemin which a company producesjust in time to satisfyneeds. Suppliersdeliver materialsjust in time to beginproduction,and finished units are completedjust in time for delivery ro cusromers, 22-23, 256-258, 356-358

K
Kaplan, Robert, 671 Key performance indicators (KPIs). Summary performance measures that help managers assesswhether the company is achieving its longterm and short-term goaIs,67 1,-676, 682.683

G.7

L
Labor accounting for manufacturing, 115-117 direct, 56, 58-59, 115-117, 61. 9- 622, 629 indirect, 57, 58-59, 116-117 Labor costs,629 Labor time record. Identifies the employee, the amount of time spent on a particular job, and the labor cost charged to the job; a record used to assign direct labor cost to specificjobs, 115-116 Lag indicators. Performance measures that indicate past performance,670 Lead indicators. Performance measures that forecast future performance,670 Learning and growth perspective, 672, 675- 676 Leverage. Earning more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the ', business. Also called trading on equity,732 Liabilities, measuring ability to pay, 725-727 Long-term debt, ability to pay,

729-730 Loss, operating,37l M Make-or-buy decisions, 437-441,

Management activity-base 247-249 d, just-in-time, 22-23, 256-2 58, 356-3s8 Management accountants ethicalchallenges tI-I4 for, within organization structure, 7-8 rolesof, 8-9 salaries 10 of, skills required for, 9-L0 Management by exception. Directs management's attentionto important differences betweenactual and budgeted amounts, 61,-5 5 62 '.-- Managerial accounting,vs. financial accounting, 2-3,5-6 Managers decision making by, 4'1"44'1.8

motivation of,670 performance measures 560-563 of, responsibilities 3-4 of, useof budgets 539-542 by, by, useof flexiblebudgets 596-602 incentives, absorption Manager's costingand,337-338 19 Manufacturers, Manufacturing companies.A company that uses labor, plant, and to equipment convertraw materials into new finishedproducts,47-48 of, financialstatements 63-64 product costsfor, inventoriable 56-58 job costing 1.32-'1.34 in, masterbudgetfoq 569 noninventoriable costsin, !34 Manufacturing costs, 56-58, 71, 332 costing, 332-337 in absorption indirect, 121.-1.26 standard, 61.1.-612 332-337 in variable costing, Manufacturingcycletime,257, 675 for, Manufacturinglabor,accounting 11,5-1,17 Manufacturing overhead(MOH). All manufacturingcostsother than direct materials and direct labor. Also called factory overheadand cost, 57-58 indirectmanufacturing for, accounting 1,21,-1,26 allocatingto jobs, 1.22-1,26 allocationof, using ABC,240-246 closing, 631 1,28-1,31, closing,at year-end, methods and,333-338 costing I28 overallocated, recording,630 ratesfor, 61.0-61.1. standard 1,28 underallocated, analysis, usingstandard variance costs,624-627 Marginal cost.The cost of producing one more unit,73 of Excess expected Margin of safety. The drop sales. sales over breakeven in sales companycan absorbwitha out incurring an operating loss, 385-386 Marketing. Promotion and advertis50 ing of productsor services, Markets, global,20 Market share.674

Master budget. The set of budgeted financialstatements and supporting for schedules an entireorganization. Includesthe operatingbudget,the capital expenditure budget,and the financialbudget. components o1,542-543 for manufacturing companies, 569 preparationof, 542-545 for service companies, 569 4 Master budgets, Materials for, accounting 1,1,1,-1,1,4 56,629 direct, rndrrect.),/ purchasing, lll raw,628 recordingcostsof, 114 using,112-113 Materials record, 11,2 Materialsrequisition. Request the for transferof both direct and indirect materials from Raw Materials Inventory to the production floor, 112-113 Merchandisingcompanies. comA pany that resells tangibleproducts previouslybought from suppliers, 47,48 financialstatements 62-63 of, product costsfor, inventoriable 55-56 usingABC in,248-249 Coststhat change, not but Mixed costs. proportion to changes volin in direct mixed costshaveboth variable ume. 303, costand fixed costcomponents, 309-3L1.,371, Money,time valueof,481-488 Motivation,667,670 N Net cashinflows,471.478,489, 490-492.495-497 Net presentvalue (NPV). The differencebetweenthe presentvalue of the investment'snet cash inflows and the investment's cost,470,471., 489-494,498 calculationof, 524-526, 531.-534 New York StockExchange,T Noninventoriable costs,134 19:20 North Americaneconomies. Norton, David,671.

G-8

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o
On-time deliveries,674 Operating budget. Projects sales revenue, cost of goods sold, and operating expenses,leading to the budgeted income statement that projects operating income for the period, 543-548 Operating costs, 54 Operating expenses, cash payments for. 552-553 Operating expensesbudget, 547 Operating income, 371 Operating leverage. The relative amount of fixed and variable costs that make up a firm's total costs, 386-389 Operating leverage factor. At a given level of sales,the contribution margin divided by operating income. The operating leverage factor indicated the percentagechange in operating income that will occur from a 1,o/o changein salesvolume,387 Operating loss, 371, Operating performance, 563 Operations,decentralized, 666-669 Opportunity costs. The benefit foregone by not choosing an alternative course of action,440 Organizational structure, 7-8 Ou tl i er s . A bnor m al d a ta p o i n ts ; data points that do not fall in the same general pattern as other data p o i n t s , 31. 9, 326 Output computation of, in equivalent units, 178-1 80, 1.90-1.91. cost per unit of,682 Outsourcing. A make-or-buy decision: Managers decide whether to buy a component product or service or produce it in-house, 413-414, 437-441 Oyerallocated manufacturing overhead. The manufacturing overhead 'Work allocated to in Process Inventory is more than the amount of manufacturing overhead costs actually incurred, 128 Overhead. Seealso Manufacturing overhead(MOH) allocation of.630

Overhead flexible budget variance. The difference between the actual overhead cost and the flexible budget overhead for the actual number of outputs, 624-625 Overhead rate, 1.22-1.23 departmental,236 plantwide,235 standard manufacturing, 610-611

P period. Payback Thelength timeit of

takesto recover, net cashinflows, in the cost of capital oudays, 470, 471.,497 Payrolltaxes,58 Percentage market share, of 674 Performance sYstems. evaluation 669-670 Performance indicators for investment centers, 683-691, KPIs,671.-676, 682, 683 lag indicators,670 leadindicators,6T0 linking companygoalsto,671. Performance measurement, 669-676. See also Financialperformancemeasurement for, balanced scorecard 671-676 goalsof, 669-670 682-691, of investment centers, limitations of, 670-671.,689-691, usingflexiblebudgets, 600-602 usingvariances, 623-624 Performance reports,603 cost centeg679 profit center,680-682 responsibility 5 accounting, 60-563 revenue center. 680 Periodcosts.Operatingcoststhat are expensed the period in which they in areincurred, 59,62-68,332,333 54, Physical units,flow of,178,1,90 priPlanning.One of management's mary responsibilities; settinggoals for and objectives the companyand them, 3, 4 decidinghow to achieve for, budgets 539-541 flexiblebudgets 598-600 for, ABC,248 using Plantwide overheadrate. Nfhen overhead is allocatedto eYeryproduct using the samemanufacturingoverheadrate,235

Post-audits. Comparing a capital investment's actualnet cashinflows to its projectednet cashinflows,472 Post-sales service. 675 Predetermined manufacturing overhead rate. An estimated manufacturing overhead allocation rate computedat the beginningof the year, calculatedas the total estimated manufacturing overhead costsdivided by the total estimated quantity of the manufacturing overheadallocation 122-123 base, Present value,24, 482-484.See also Net present value(NPV) calculation 485-488, 529-531, of, tablesof, 51,7-518 Present valueindex,493 Preventioncosts.Costs incurred to avoid poor-quality goods or services, 258-2 59,260 Price/earnings ratio. Ratio of the market price of a shareof common stock to the company's per earnings share.Measurethe value that the stockmarketplaces $1 of a comon pany'searnings, 733 Price-setters , 422423 Pricestandards, 609-610 Price-takers, 422-423 Price variances.The differencein prices(actualprice per unit minus standardprice per unit) of an input multiplied by the actual quantity of the input. directlabor,61,9-620 directmaterials,61,6 pitfalIs,622 useof, 623-624 Pricing cost-plus, 108-109,425-427 regular,421.-427 special orders,41.8-421 targe\ 423425 usingABC, 247-248 Primecosts. combinationof direct the materialand directlabor costs,58 Process costing.System assigning for coststo large numbersof identical units that usuallyproceed continin uousfashionthrougha series uniof form production stepsor processes, 1,06-107 building blocks of, 1,73-17 5

Glindex

G-9

illustration 175-177 of. L68-L72 vs. job costing, journal entriesin, 1,93-1,9 5 168-172 overview, steps 178-1,83, in, 1,88-1,93 transferred-in costsand, 188 weighted-average methodof, 175 Productcosting, 4 Product costs, 54-58, 59,333 FIFOmethodof,175 in financialstatements, 62-68 full, 54, 105 inventoriable, 54-55, 55-59, 1,05 traditional,256 Productdevelopment, 675 Product life cycle. The length of time betweena product'sinitial development and its discontinuance the in market,690 Production.Resources usedto producea productor services to puror chase finishedmerchandise intended for resale, 50 just-in-time, 22-23, 256:258 traditional, 255 Productioncostreports,195-L96 Production efficiency, 5 67 Productionvolumevariance. The differencebetweenthe manufacturing overhead cost in the flexible budget for actualoutputs and the standard overheadallocatedto production, 625-627 Productlife cycles, 690 Product mix decision 247-248. s. 434437 Products profitability of, using assessing ABC,24OJ46 deciding when to selI,441,-443 dropping,430434 Professional 1 association, 1 Profitability assessing, usingABC, 240-246 measuring, 730-732 Profitability index. An index that computesthe number of dollars returnedfor everydollar invested, with all calculationsperformed in presentvalue dollars. Computedas presentvalue of net cash inflows divided by investment.Also called present valueindex,492493

A Profit centers. subunit responsible and controlrevenue for generating lingcosts, 559,560,669,679 performance reports,680-682 Profits gross, 334-335 planning,usingCVP analysis, 368-371, target,368-370,377, 378, 380, 382 Promotion,50 Resources usedto produce Purchases. or a product or services to purchase intended for finished merchandise resale. 50 for, cashpayments 552 raw materiaIs,629

a
Qualitative f.actors,41.7 Quality,257,258-262 of, evaluation Quality initiatives, 260-262 609 Quantity standards, Quick ratio. Ratio of the sum of cash plus net plus short-terminvestments total current to current receivables IiabiIities, T2T

R
Rate of return on comnlon stockholders' equity. Net income minus preferred dividends divided by averagecommon stockholders' equity. A measure of profitability. Also called return on equitS 731.-732 Rate of return on net sales. Ratio of net income to net sales.A measure of profitability. AIso called return on sales,730 Rate of return on total assets. Net income plus interest expense divided by average total assets. This ratio measures a company's success in using its assetsto earn income for the people who finance the business.Also 731 called return on assets. Ratios account receivable turnov eg 728 acid-test,727 book value per share of common stock.733-734 current, 725-727

-sales-in-receivable28-729 s, 7 days' debt,729 for decision making,725-734 dividendyield,733 per earnings share,732 inventoryturnover,727-728 price/earnings, 733 quick,727 rateof return on net sales, 730 731 returnon assets. return on equity,731,-732 earned, 30 7 times-interestRaw materials, 56,628 Raw materials inventory. All raw materialsnot yet usedin manufacturing, 48 proRegression analysis. statistical A the cedurefor determining line that bestfits the data by using all of the historicaldata points, not just the high and low data points, 322-325 Relevantcosts, 69-70, 41 5-416 Relevant information. Expected future data that differsamongalter41,7 natives,41,5-41,6, Relevant informationapproach, to making, 41,741,8 decision Relevantrange.The band of volume where total fixed costsremain constantat a certainleveland wherethe variablecost per units remainsconstantat a certainlevel,311-313, 599 Requiredrate of return,490 Research& development(R6.D). new or Researching developing and productsor services the or improved processes producingthem, 50 for income(RI). A measure of Residual profitability and efficiency computedas the excess actualincome of minimum acceptover a specified ableincome, 686-687,689 Residualvalue,493494 Responsibility, delegation 667 of, Responsibilityaccounting.A system for evaluating the performanceof each responsibilitycenter and its manager, 558-563,679-682 Responsibility centers. part or subA unit of an organizationwhose manager is accountablefor specific activities. 558-560.668-669

G-lO

Glindex

Retailers. merchandisingcompany that sells consumers.20.49 to Retention, 667 Retirement plans,58 Return on assets. Net income plus interestexpense divided by average total assets. This ratio measures a company's success usingits assets in to earn income for the peoplewho financethe business. Also calledrate of return on total assets, 731 Return on equity.Net incomeminus preferreddividends dividedby averagecommonstockholders'equity. A measure profitability.Also called of rate of return on common stockholders'equity,731,-732 (ROI), A meaReturn on investment sure of profitability and efficiency computed as operating income divided by total assets, 673, 683-686,689 Return on sales. Ratio of net income to net sales. measure profitabilA of ity. Also calledrate of return on net sales.,/JU Revenue centers. subunitresponsible A only for generatingrevenue,559, 560,669,679 performance reports,680 Revenue growth, 682 Risk indicators, 385-389 margin of safety, 385-386 operatingleverage, 86-389 3 R-square statistic, 323

s
Salaries, l0 Saleof finishedgoods,accounting for,127-128 Sales, rate of return on,730 Sales budget,545-546 Sales margin.The amount of income earnedon every dollar of sales;a componentof the ROI calculation computed as operating income dividedby sales,684-685 Sales mix. The combinationof products that make up total sales, 381-384 Sales prices changing, and CVP analysis, 376-377 special,418-421

growth, 673 Sales revenue Sales revenue line, 370 The difference Sales volumevariance. between staticbudgetamountand a a flexible budget amount arising only because number of units the actually sold differs from the static budgetunits,602-604, 606 Sarbanes-Oxley (20021.A conAct gressionalact that enhances internal control and financial reporting requirements and establishes new for regulatoryrequirements publicly traded companiesand their independentauditors,1,8-1,9 plots,318-320 Scatter 20 Self-scanning checkouts, general, Selling, and administrative (SG&A)costs,54 SeniorexecutiYes, 7-8 analysis. "what-if" techA Sensitivity nique that askswhat resultswill be if actualpricesor costschange if or an underlyingassumptionchanges, 376-384 for budgeting,556-557 informationtechnologyand, 384 for, informationtechnology 5 56-5 57 net present valueand, 493494 Service companies. companythat A rather than sellsintangibleservices products, 47, 48 19, tangible allocatingcostsin, 695-696 financialstatements 62 of, product costsfor, 56 inventoriable job costing 1.34-736 in, masterbudgetfor, 569 usingABC in,248-249 Setuptimes,257 Shortcutapproach, finding to point, 366-368 breakeven special, Short-term decisions, 41.741.8,430443 Short-termfocus,690-691. Simple interest. Interest computed only on the principalamount,481 418-42I Special order decisions, costaccounting systems, Standard 628-633 Standard costincomestatement, 632-633 Standardcosts.A budgetfor a single unit.609-627

analyzingdirect labor variances with.619-622 analyzrng direct material variances with. 613-618 analyzingmanufacturingoverhead variances using,624-627 of inputs,61,1,-61,2 manufacturing overhead rates, 61.0-611 price standards, 609-61,0 quantitystandards, 609 Statement budgeted of cashreceipts and payments, 551-554 Statement cashflows, budgeted, of 554-555 Statement Ethical Professional of Practice(IMA), 11.,1.2,1.3 Staticbudgets. The budgetprepared for only one levelof sales volume.Also calledthe masterbudget,597, 622 Staticbudgetvariance, 602 Step costs.A cost behaviorthat is fixed over a small range of activity and then jumps to a different fixed level with moderatechanges volin ume,3L3-314 profit expectations Stockholders, of,422 Stockinvestments,32-734 7 Finance, Strategic 1,7 Sunkcosts. pastcostthat cannotbe A changedregardless which future of actionis taken,70,4'1,6 Supplychain management. Exchange of information with suppliers to reduce costs,improve quality and speed deliveryof goodsand services form suppliers the companyitself to and on to customers , 22,257

T
Target fixed cost,424 Target full cost. The total cost to develop,design,produce,market, deliver, and service product,423 a Targetpricing,423-425 Targetprofit, 368-370, 382 affect of changes fixed costs in on. 380 affectof changes salesprice in on,377 affectof changes variable costs in on,378 Territories, dropping,430434

Glindex G. l1

Throughput tirne. The time between buying raw materials and selling finished products, 22 TI-83 calculator, 521.-528 TI-83 Pluscalculator,521.-528 TI-84 calculator,521.-528 TI-84 Pluscalculator,521-528 Time-based competition, 20-23 Times-interest-earned ratio. Ratio of incomefrom operations interest to expense. Measures the number of times operatingincomecan cover interestexpense, 730 Time value of money. The fact that money can be invested to earn incomeover time, 481488 calculations, 521.-524, 529-534 factors affecting, 481,482 future value,482485 presentvalue,482-484,485-488 Totalassets, 690,731, Total costs assigning, units completed, to 181-183, 1.92-1.93 calculationof,72-73 , relevantrangeand, 311,-31,3 summaizing,in process costing, . 1,80-181,192 Total expense line, 371 Total fixed costs,307 Total mixed costs,309 Total quality management (TQM). A philosophyof delightingcustomersby providingthem with superiorproductsand services. Requires improving quality and eliminating defects and wastethroughout the value chain,22-24, 258-262 Total variablecost,304 Trace.To assign directcostto a cost a object, 53 Trading on equity. Earning more income on borrowed money than the relatedinterestexpense, thereby increasing earningfor the ownthe ers of the business.Also called
I

Treasurer. The position responsible for raising the firm's capital and investing funds, 7 Trend percentages.A form of horizontal analysis in which percentagesare computed by selecting as base year as 100'/" and expressing amounts for following years as a percentage of the baseamount, 718

Variance. The difference between an actual amount and the budget, 597. Seealso specific types Vertical analysis. Analysis of a financial statement that reveals the relationship of each statement item to a specified base, which is the 100% figure, 719-721 Volume, affect of, in costs, 302-31,4

U
Uncontrollablecosts.Coststhat canin not be changed influenced the or shortrun by management,6S-69 Underallocated manufacturingoverhead. The manufacturingoverhead allocated to \Work in Process Inventoryis lessthan the amount of costsactumanufacturing overhead ally incurred,128 Unethical behavior, illegal vs. 14 behavior, rollingup, 557-558 Unit budgets, margin,362-363, Unit contribution 366,369,379 Unit costs, 1.83,1.95 managers, motivation of,670 Unit costs, 424 Unit variable

w
Waste elimination,256 \il/eighted-average contribution margin, 381,-382 Weighted average cost of capital (WACC). The company'scost of capital;the targetrate of return used in EVA calculations represent to the return that investorsand long-term creditorsexpect,688 Weighted-average methodof process costing,175 Wholesaler. Merchandising companiesthat buy in bulk from manufacturers,mark up the prices,and then sellthoseproductsto retailers, 47 Work in process invenfory.Goodsthat are partwaythrough the manufacturing process not yeycomplete, but 48 Working capital. Current assets minus current liabilities;measures a business's ability to meetits shortterm obligationswith its current 725 assets,

V
Vacation benefits, 58 Value chain. the activities that add value to a firm's products and services.IncludesR&D, design,producmarketing, distribtion or purchases, ution, and customer service,105 businessactivities in, 49-51. coordinating activities across, 51 Value engineering. Reevaluating activities to reduce costs while satisfying customer needs,248 Variable costing. The costing method that assignsonly variable manufacturrng costs to products, 332-337 Variable costing contribution margin rncome statement, 33 5-336 Variable costs. Costs that change in total in direct proportion to changes in volume, 70-71, 303-306 changing, and CVP analysis, 377-379 relevantrangesof,312

x
X variable ! coefficient.322

z
Zero profit. SeeBreakeven point

levefage) / 5z

r ^^

Traditional production systems, 255, 256 Training,667 Transferred-in costs. 188