G lin dex

A Combined Glossary/Subiect

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

using for decision making,

247-249
usingfor job costing,239-240

Activity-basedmanagement(ABM).
Using activity-basedcost information to make decisionsthat increase
profits while satisfyingcustomer's
Absorption costing income statement,
needs,247-249
334,420,421.
Activity cost allocation rates,237
Accountanalysis.
A methodfor deter- Advertising,50
mining cost behavior that is based
Allocate.To assignan indirectcostto
on a manager'sjudgment in classifya cost object,54
ing each general ledger account as a
base.A common denomiAllocation
variable, 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 averageannualoperindirect cost,1,22
ating income from an assetby the
Annuities. A stream of equal
initial investmentin the asset.471.
installmentsmade at equal time
476478,497
intervals,481
Accountsreceivableturnover.Measure
calculatingfuture valueof,
a company'sability to collect cash
484-485
from credit customers.To compute
presentvalueof,
calculating
accountsreceivableturnover,divide
485-488
net credit sales by average net
internalrate of return with,
accountsr eceivable,728
495496
Accrual accounting,476
net presentvaluewith, 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
to total
vices,259,260
current liabilities.Tellswhetherthe
Assets
entitycanpay all of its currentliabilcapital,470
ities if they come due immediately.
residual
valueof, 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
becomethe building blocks for comAudit
committee.A subcommitteeof
piling the indirectcostsof products,
board
of directorsthat is responthe
services,
and customers,238-246
both the internal
siblefor overseeing
productprofitability
assessing
audit function and the annualfinanwith,240-246
cial statementaudit by CPAs.
cost-benefittest,249-Z 50
Averagecosts.The total cost divided
developmentof systemfor,
by the numberof units, 72-73
238-239
Averageunit costs,183

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
comparative,7 1.7-7 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,

36s-368.382-384
graphing,371.
Budgetedbalancesheet,554
Budgetedincomestatement,548
Budgetedmanufacturingoverhead
rate.!23

G-l

G.2

Glindex

Budgetedstatementof cashflows,
554-555,556
Budgets.Quantitative expressionof
a plan that helpsmanagerscoordinate and implementthe plan, 3. See
also Capital budgeting
benefitso1,540-542
capitalexpenditures,
543
cash,551-554
employeeacceptance
of, 555-556
tlnancral.JJ I-JJ6
flexible,596-602
inventorSpurchases,
and cost of
goodssold,546-547
master,4, 542-545.569
operating,545-548
operatingexpenses,
547
for planningand controlling,
539-540
rollingup unit, 557-558
sales,545-546
sensitivityanalysisfo4 556-557
static,597, 622
usesof, 539-542
using,to control operations,
558-563
Budgetvariances,4
Business
activities,in valuechain,
49-51.
Business
decisions.
SeeDecisions
Business
environment,18-25
Business
functions,234-235
Business
sectors,47-49
Business-to-business
(82B)
e-commerce,21

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

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,

Comparativebalancesheets,
717-719,720
Cash budgets. Details how the busiComparativeincomestatements,
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
estearnedto date,481
discounting,485-488
Confidentiality,
!2
net cash inflows, 471-475,
Constraints.
A
factor
that restrictspro477478, 489, 490-492
product,
duction
or
sale
of a
434436
Cash payments, budgeted, 552-553
Centralized decision making. Refers
Continuousimprovementphilosophy.
to companies in which all major
A philosophyrequiringemployees
to
planning and operating decisions
continuallylook for waysto improve
are made by top managemenq 666
performance
,24-25
Certified Financial Manager (CFM).
Contribution margin. Salesrevenue
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,
decisionmaking, 41.7-41,8
capital structure, businessvaluation,
Contribution rnargin income stateand risk management, 11
ments. An income statementthat
Certified Management Accountant
groupscostsby behaviorratherthan
(cMA), 11
function;can only be usedby inter(CPAs),
Certifiedpublicaccountants
nal management,326-327, 335,
7-8,1.9
362-363,420,431
Chief executiveofficer (CEO). The
Contribution margin per unit. The
positionhired by the board of direcexcessof the unit salespriceoverthe
tors to overseethe companyon a
variablecost per unit. Also called
daily basis,7
unit contributionmargin,363
Chief financial officer (CFO). The
Contribution margin ratio. Ratio of
position responsiblefor all of the
contribution margin to salesrevenue,
company'sfinancialconcerns,7
363-365, 367-368, 369, 383-384
Chief operatingofficer (COO). The
Control decisions,usingABC, 248
positionresponsible
for overseeing Controllable costs. Costs that cdrr v
the company'soperations,7
be influenceor changedby manageClimatefor 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 businessoperations
againstthe plan and making adjustmentsto keepthe companypressing
toward its goal, 3
Conversioncosts.The combination
of direct labor and manufacturing
overheadcosts,58,173
Coordination,541
Corecompetencies,
414
Corporatescandals,18
Cost allocatedsystems,needfor
more accurate,233-237
Cost allocation. Assigningindirect
coststo costobjects,111
for activities,243-245
Costallocationbase,135
Cost assignment.
A generalterm that
refersto both tracing direct costs
and allocatingindirect coststo cost
L11
objects,
Cost behaviors.Describeshow costs
changeasvolumechanges,302-31,4
determining,31,7-326
fixed costs,306-309
high-lowmethod for, 320-322
mixedcosts,309-311
regressionanalysisof, 322-325
relevantrangeand, 31,1,-31,3
stepcosts,373-31,4
variablecosts,303-306
Cost-benefitanalysis.Weighingcosts
againstbenefitsto help make decisions,2415
for ABC, 249-250
of quality programs,260:262
Cost centers.A subunit responsible
only for controlling costs, 559,
560,669
performancereports,679
Cost distortion. Overcostingsome
productswhile undercostingother
products,234
Cost driver. The primary factor that
causesa costr122
Costequations.A mathematicalequation 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
.

it

va r la Dle . 55L-JJ

Cost objects. Anything for which

managerswant a separatemeasurement of costs,53-54
Costof capital,688
Cost of goods manufactured.The
manufacturingcost of the goods
that finishedthe productionprocess
this period,63-64
calculationof,64-66
Costof goodssold,55,63, I29-I30
Cost of quality reports.A report that
lists the costsincurred by the company relatedto qualiry The costsare
categorized as prevention costs,
appraisedcosts,internalfailure costs,
and externalfailurecosts,258
Cost per unit of output, 682
Cost-pluspricing. An approachto
pricing that beginswith the product's full costsand adds a desired
profit to determinea cost-plusprice,
108-109,425-427
Cost predictions
data concernsandr326
usinghigh-lowmethod,325
325
analysis,
usingregression
production,'1..9
5-196
Cost reports,
Costs
accountanalysisof, 31.7-320
activity,237
affectof volume on,302-31.4
allocating,54
appraisal,259,260
assigning,54
averag%72-73
averageunit, 183
68-69
controllable,
conversion,58,1.73
cutting,248
differential,69
direct,53-54
duplicationof,668
externalfailure, 259, 260
62-68
in financialstatements.
Iixed, 70-7 1, 303, 306-309,
379-381,43L432
flexiblebudget,598-600
flow of, in costing,168-L72

flow of, through inventoryaccounts,

66-67
functionalseparationof, 326-327
indirect,53-54,234
internalfailure, 259, 260
irrelevant,69-70, 415-41,6
labor,629
labor compensation,
58-59
manufacturing,56-58, 7 1.,
1.21.-1.26,
332, 611-61,2
marginal, T3
materials,1.1.1.-1.1.4
merchandising,
55-56
mixed,303,309-311, 37L
noninventoriable,134
operating,54
opportunity,440
overhead,121-126
per equivalentunits, 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
41.541.6
relevant,69-70, 31.1.-31.3,
standard,609-627
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
transferred-in,188
uncontrollable,68-69
unit, 183,L95
variable,70-7 1.,303-306, 31.2,
377-379
Costsof qualitS 258-262
Cost systems,needfor accurate,
233J34
Cost tracing.Assigningdirectcoststo
costobjectsthat usedthosecosts,L11
Cost variances
directlabor,61.9-622
for directmaterials,61.3-61.8
useof, 623-624
Cost-volume-profit (CVP) analysis.
Expressesthe relationship among
costs,volume,and profit or loss.
assumptions
, 361-362
for changingbusinessconditions,
376-384
componentsof,361.
contributionmargin ratio, 363-365
datarequiredfor,36l
effectof salesmix on, 381-384

G.4

Glindex

graphingrelationships,370-371
planningprofits wing, 368-371
sensitivityanalysiswith, 376-3 84
unit contributionmargin,362-363
usefulness
of,360
usingto find breakeven
point,
365-368
Credibility,12
Cross-functional teams. Corporate
teamswhosemembersrepresentvarious functionsof the organization,8
Currentassets,68
Current ratio. Current assetsdivided
by currentliabilities.Measuresability to pay current liabilities with
current assets,725-727
Curvilinear costs. A cost behavior
that is not linear,3L4
Customerperspective,
672, 673-674
Customer relations,667
Customersatisfactionratings,674
Customerservice.Supportprovided
for customersafter 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
advantagesof,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.Seealso Invesrmenr
decisions
to drop products,departments,
or
terntones,430434
outsourcing,437441
product mix,434437
regularpricing,421.-427
sellasis or processfurther, 441443
short-termspecial,41.7-418,
430443
specialsalesorder,418421
Defectrate,675
Demand,limited,and productmix,
436437
Demand-pullsystems,257
Departmentaloverheadrate. Separate
manufacturingoverheadratesestablishedfor eachdepartment,236
Departments,dropping,430-434
Depreciation,
57-58,690
Design.Detailedengineeringof products and servicesand the processes
for producingthem, 50
Differential cost. The difference in
costbetweentwo alternativecourses
of action,69
f)irect costs.A costthat can be traced
to a costobject,53-54
priDirecting. One of management's
mary responsibilities;
running the
companyon a day-to-daybasis,3
Direct labor (DL). The cost of compensatingemployees
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
variancesin,61.9-622
Direct materials(DM). Primaryraw
materialsthat becomea physical
partof a finishedproductand whose
costsare traceableto the finished
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
servicesto customers,51
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
Earningsper 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
residualincomemeasurecalculating
the amount of incomegeneratedby
the companyor divisionsin excess
of stockholders'and long-termcreditors' expectations,
687-689
Economies,shifting,19-20
Efficiencyvariances.Measureswhether
the quantityof materialsor labor used
to makethe actualnumberof outputs
is within the standardallowedfor that
numberof outputs.
directlabor,620-621,
direct materials,61,7
pitfalls,622
useof, 623-624
Electronicbilling, 21
Electroniccommerce,20, 21,-22
Employeecapabilities,675-67 6
Employeecompensation,
58-59
Employeeperformance,evaluation
of, usingvariances,623-624
Employeeroles,in JIT systems,257
Employees,
acceptance
of budgetby
555-556

Glindex

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
Equivalentunits, 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,communication of, 669
Expertknowledge,667
Externalfailure costs.Costsincurred
when the companydoesnot detect
poor-qualitygoodsor servicesuntil
after deliveryis madeto customers,
259,260
Externalreporting,inventoriable
product costsfor, 54-55

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

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,

70-71.,303,306-309
avoidable,432
changing,and CVP analysis,
379-381,
of, 308
characteristics
committed,306
discretionary,306
relevantrangesofr 312
targe\ 424
unavoidable.431432
Fixedexpenseline, 370
Flexiblebudgets.A summarizedbudget preparedfor different levelsof
volume.
defined,597-598
performanceevaluationusing,
600-602
for planning, 598-600
useof, by managers,
596-602
Flexiblebudget variance.The differencearising becausethe company
actuallyearnedmore or lessrevenue
or incurredmore or Iesscost than
expectedfor the actuallevelof outpvt, 602-603,605-606
401(k)plans,58
Fringebenefits,58-59
Full product costs.The costsof all
resources
usedthroughoutthe value
chainfor a product,54,55,105
FuturevaIue,482-485,5 19-520

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.5

of flexiblebudgetcosts,
599-600,601
scatterplots,318-320
Grossmargingrowth,673,682
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.

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
reconcilingdifferencesin, 336-337
residual,686-687
Incomestatementapproach,to finding breakevenpoint,
365-366,369-370
Incomestatements.Seealso
Financialstatements
absorptioncosting,334, 420, 421,
budgeted,
548
common-si2e,721,722
comparative,
7 16-717, 7 1-9
contributionmargin,326-327,
335,362-363,420,431.
horizontalanalysisof, 7 1,6-71,7
of manufacturingcompanies,64
of merchandising
companies,
62-63
operating,371.
of servicecompanies,62
standardcost,632-633
variablecostingcontributionmargin,
335-336
verticalanalysisof, 71,9
Incrementalanalysisapproach,
417-41.8,420441
for decidingwhen to seLI,441,443
for droppingproducts,431.-433
for outsourcingdecisions,438-439
Indirect costs.A cost the relatedto
the costsobjectbut cannotbe traced
to it. 53-54.234

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 )

674-67s
Internaldecisionmaking,full product costsfor, 54
Internal failure costs.Costsincurred
when the companydetectsand corrects poor-quality goods or service
beforedeliveryto customer,259, 260
Internalrate of return (IRR).The rate
of return (basedon discountedcash
flows) that companycan expectto
earn by investingin a capital asset.
The interestrate that makesNPV of

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
costs are not expensesuntil the product 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,
and cost of
goodssold budget,546-547
Inventory turnover, Ratio of cost of
goods sold to averageinventory.
Indicateshow rapidly inventoryis
sold,727-728
Investmentcenters.A subunitresponsible for generatingprofits and efficiently managing the division's
invested
capital(assets),
5 59, 560,669
financialperformanceof, 682-691
Investmentdecisions.Seealso
Capital budgeting
time valueof moneyand,481-488
usingaccountingrate of return,
476-478
usingdiscountedcashflow models,
488-497
usingpaybackperiod,473476
Investments,stock,732-7 34
Irrelevantcosts,69-70, 415416
ISO 9001:2000 certification.23-24

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

accountingfor completionand sale

of finishedgoods,1,27-128
accountingfor manufacturing
labor.115-117
accountingfor manufacturing
overhead,I2t-1.26
accountingfor materials,1,1,1,-1,14
closingmanufacturingoverhead,
128-131,
decisionmaking and, 107-109
informationtechnologyfo4 132-133
in manufacturingcompany,1.32-1,34
vs.process
costing,168-172
in servicecompanies,134-136
stepsin, 110-111
summarizingjob's cost,1.07-1.09
usingactivity-based
costingfor,
239-240
Job cost record.The documentthat
accumulatedthe direct materials,
direct labor, and manufacturing
overhead costs assignedto each
individualjob, 108,1.09,1.13,
LL6
costs,
flow
of,
through
accounts,
Job
1,09-1,1,0
allocating
manufacturingoverJobs,
headto, 122-126
Journalentries
in processcosting,1,93-1,95
standardcost accountingsystems,
628-631
Just-in-time(JIT) costing.A standard
costingsystemthat startswith output completed and then assigns
manufacturingcosts to units sold
and to inventories.Also calledbackflush costing.
exampleof,266-268
featuresof,266
Just-in-time (JIT) management.A
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
d, 247-249
just-in-time,22-23, 256-2 58,
356-3s8
Managementaccountants
ethicalchallengesfor, tI-I4
within organizationstructure,7-8
rolesof, 8-9
salaries
of, 10
skills required for, 9-L0
Management by exception. Directs
management's
attentionto important differencesbetweenactual and
budgetedamounts,561,-562
'.-- Managerial accounting,vs. financial
accounting,
2-3,5-6
Managers
decisionmaking by, 4'1"44'1.8

motivation of,670
performancemeasures
of, 560-563
responsibilities
of, 3-4
useof budgetsby, 539-542
useof flexiblebudgetsby, 596-602
Manager'sincentives,absorption
costingand,337-338
Manufacturers,19
Manufacturing companies.A company that uses labor, plant, and
equipmentto convertraw materials
into new finishedproducts,47-48
financialstatementsof, 63-64
inventoriableproduct costsfor,
56-58
job costingin, 1.32-'1.34
masterbudgetfoq 569
noninventoriablecostsin, !34
Manufacturingcosts,56-58, 71, 332
in absorptioncosting,332-337
indirect, 121.-1.26
standard,61.1.-612
in variablecosting,332-337
Manufacturingcycletime,257, 675
Manufacturinglabor,accountingfor,
11,5-1,17
Manufacturing overhead(MOH).
All manufacturingcostsother than
direct materials and direct labor.
Also called factory overheadand
indirectmanufacturingcost, 57-58
accountingfor, 1,21,-1,26
allocatingto jobs, 1.22-1,26
allocationof, using ABC,240-246
closing,631
closing,at year-end,1,28-1,31,
costingmethodsand,333-338
overallocated,I28
recording,630
standardratesfor, 61.0-61.1.
1,28
underallocated,
varianceanalysis,usingstandard
costs,624-627
Marginal cost.The cost of producing
one more unit,73
Margin of safety.Excessof expected
salesover breakevensales.The drop
in salesa companycan absorbwithout incurring an operating loss,
385-386
Marketing. Promotion and advertising of productsor services,50
Markets, global,20
Market share.674

Master budget. The set of budgeted

financialstatementsand supporting
for an entireorganization.
schedules
Includesthe operatingbudget,the
capital expenditurebudget,and the
financialbudget.
componentso1,542-543
for manufacturingcompanies,569
preparationof, 542-545
for servicecompanies,569
Master budgets,4
Materials
accountingfor, 1,1,1,-1,1,4
direct,56,629
rndrrect-.),/
purchasing,
lll
raw,628
recordingcostsof, 114
using,112-113
Materials record, 11,2
Materialsrequisition.Requestfor the
transferof both direct and indirect
materials from Raw Materials
Inventory to the production floor,
112-113
Merchandisingcompanies.A company that resellstangibleproducts
previouslybought from suppliers,
47,48
financialstatementsof, 62-63
inventoriableproduct costsfor,
55-56
usingABC in,248-249
Mixed costs.Coststhat change,but not
in directproportion to changesin volume.mixed costshaveboth variable
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'scost,470,471.,
489-494,498
calculationof, 524-526, 531.-534
New York StockExchange,T
Noninventoriablecosts,134
North Americaneconomies.19:20
Norton, David,671.

G-8

Glindex

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/ochangein 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.Thelengthof timeit
Payback
takesto recover,in net cashinflows,
the cost of capital oudays, 470,
471.,497
Payrolltaxes,58
Percentage
of market share,674
PerformanceevaluationsYstems.
669-670
Performanceindicators
for investmentcenters,683-691,
KPIs,671.-676,682, 683
lag indicators,670
leadindicators,6T0
linking companygoalsto,671.
Performance
measurement,
669-676.
Seealso Financialperformancemeasurement
balancedscorecardfor, 671-676
goalsof, 669-670
of investmentcenters,682-691,
limitations of, 670-671.,689-691,
usingflexiblebudgets,600-602
usingvariances,623-624
Performance
reports,603
cost centeg679
profit center,680-682
responsibilityaccounting,5 60-563
revenuecenter.680
Periodcosts.Operatingcoststhat are
expensedin the period in which they
areincurred,54,59,62-68,332,333
Physicalunits,flow of,178,1,90
Planning.One of management'sprimary responsibilities;
settinggoals
and objectivesfor the companyand
decidinghow to achievethem, 3, 4
budgetsfor, 539-541
flexiblebudgetsfor, 598-600
usingABC,248
Plantwide overheadrate. Nfhen overhead is allocatedto eYeryproduct
using the samemanufacturingoverheadrate,235

Post-audits. Comparing a capital

investment'sactualnet cashinflows
to its projectednet cashinflows,472
Post-sales
service.675
Predeterminedmanufacturing overhead rate. An estimatedmanufacturing overhead allocation rate
computedat the beginningof the
year, calculatedas the total estimated manufacturing overhead
costsdivided by the total estimated
quantity of the manufacturingoverheadallocationbase,122-123
Presentvalue,24, 482-484.Seealso
Net presentvalue(NPV)
calculationof, 485-488, 529-531,
tablesof, 51,7-518
Presentvalueindex,493
Preventioncosts.Costs incurred to
avoid poor-quality goods or services,258-2 59,260
Price/earningsratio. Ratio of the
market price of a shareof common
stock to the company'searningsper
share.Measurethe value that the
stockmarketplaceson $1 of a company'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
specialorders,41.8-421
targe\ 423425
usingABC, 247-248
Primecosts.the combinationof direct
materialand directlabor costs,58
Processcosting.Systemfor assigning
coststo large numbersof identical
units that usuallyproceedin continuousfashionthrougha seriesof uniform production stepsor processes,
1,06-107
building blocks of, 1,73-175

Glindex

illustration
of. 175-177
vs. job costing,L68-L72
journal entriesin, 1,93-1,9
5
overview,168-172
stepsin, 178-1,83,1,88-1,93
transferred-incostsand, 188
weighted-average
methodof, 175
Productcosting,4
Productcosts,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 discontinuancein the
market,690
Production.Resourcesusedto producea productor servicesor to purchasefinishedmerchandise
intended
for resale,50
just-in-time,22-23, 256:258
traditional,255
Productioncostreports,195-L96
Production efficiency,675
Productionvolumevariance.The differencebetweenthe manufacturing
overheadcost in the flexible budget
for actualoutputs and the standard
overheadallocatedto production,
625-627
Productlife cycles,690
Productmix decision
s. 247-248.
434437
Products
profitability of, using
assessing
ABC,24OJ46
decidingwhen to selI,441,-443
dropping,430434
Professional
association,11
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
presentvalueindex,492493

Profit centers.A subunit responsible

for generatingrevenueand controllingcosts,559,560,669,679
performancereports,680-682
Profits
gross,334-335
planning,usingCVP analysis,
368-371,
target,368-370,377, 378, 380, 382
Promotion,50
Resources
usedto produce
Purchases.
a product or servicesor to purchase
finished merchandiseintended for
resale.50
cashpaymentsfor, 552
raw materiaIs,629

a
Qualitative f.actors,41.7
Quality,257,258-262
Quality initiatives,evaluationof,
260-262
Quantity standards,609
Quick ratio. Ratio of the sum of cash
plus net
plus short-terminvestments
total
current
current receivablesto
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
called return on assets.731
Ratios
account receivable turnov eg 728
acid-test,727
book value per share of common
stock.733-734
current, 725-727

G-9

s, 728-729
days'-sales-in-receivable
debt,729
for decisionmaking,725-734
dividendyield,733
earningsper 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,730
times-interestRaw materials,56,628
Raw materials inventory. All raw
materialsnot yet usedin manufacturing, 48
Regression
analysis.A statisticalprocedurefor determiningthe 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,
Relevantinformationapproach,to
decisionmaking, 41,741,8
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).
Researching
and developingnew or
products
improved
or servicesor the
processes
for producingthem, 50
Residualincome(RI). A measureof
profitability and efficiency computedas the excessof actualincome
over a specifiedminimum acceptableincome,686-687,689
Residualvalue,493494
Responsibility,
delegationof, 667
Responsibilityaccounting.A system
for evaluating the performanceof
each responsibilitycenter and its
manager,
558-563,679-682
Responsibilitycenters.A part or subunit of an organizationwhose manager is accountablefor specific
activities.
558-560.668-669

G-lO

Glindex

Retailers. merchandisingcompany
that sellsto consumers.20.49
Retention,667
Retirementplans,58
Return on assets.Net income plus
interestexpensedivided by average
total assets.This ratio measuresa
company'ssuccess
in usingits assets
to earn income for the peoplewho
financethe business.
Also calledrate
of return on total assets,731
Return on equity.Net incomeminus
preferreddividendsdividedby averagecommonstockholders'equity.
A
measureof profitability.Also called
rate of return on common stockholders'equity,731,-732
Return on investment(ROI), A measure 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.A measureof profitability. Also calledrate of return on net
sales.,/JU
Revenuecenters.
A subunitresponsible
only for generatingrevenue,559,
560,669,679
performancereports,680
Revenuegrowth, 682
Risk indicators,385-389
margin of safety,385-386
operatingleverage,386-389
R-squarestatistic,323

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

Salesrevenuegrowth, 673
Salesrevenueline, 370
Salesvolumevariance.The difference
betweena staticbudgetamountand
a flexible budget amount arising
only becausethe number of units
actually sold differs from the static
budgetunits,602-604, 606
Sarbanes-Oxley
Act (20021.A congressionalact that enhancesinternal
control and financial reporting
requirementsand establishesnew
regulatoryrequirementsfor publicly
traded companiesand their independentauditors,1,8-1,9
Scatterplots,318-320
Self-scanning
checkouts,20
Selling,general,and administrative
(SG&A)costs,54
SeniorexecutiYes,
7-8
Sensitivityanalysis.A "what-if" technique that askswhat resultswill be
if actualpricesor costschangeor if
an underlyingassumptionchanges,
376-384
for budgeting,556-557
informationtechnologyand, 384
informationtechnologyfor,
5 56-557
net presentvalueand, 493494
Servicecompanies.A companythat
sellsintangibleservicesrather than
tangibleproducts,19, 47, 48
allocatingcostsin, 695-696
financialstatements
of, 62
inventoriableproduct costsfor, 56
job costingin, 1.34-736
masterbudgetfor, 569
usingABC in,248-249
Setuptimes,257
Shortcutapproach,to finding
breakevenpoint, 366-368
Short-termdecisions,special,
41.741.8,430443
Short-termfocus,690-691.
Simple interest. Interest computed
only on the principalamount,481
Specialorder decisions,418-42I
systems,
Standardcostaccounting
628-633
Standardcostincomestatement,
632-633
Standardcosts.A budgetfor a single
unit.609-627

analyzingdirect labor variances

with.619-622
analyzrngdirect material variances
with. 613-618
analyzingmanufacturingoverhead
variancesusing,624-627
of inputs,61,1,-61,2
manufacturingoverheadrates,
61.0-611
price standards,609-61,0
quantitystandards,609
Statementof budgetedcashreceipts
and payments,551-554
Statementof cashflows, budgeted,
554-555
Statementof Ethical Professional
Practice(IMA), 11.,1.2,1.3
Staticbudgets.The budgetpreparedfor
only one levelof salesvolume.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 moderatechangesin volume,3L3-314
Stockholders,profit expectations
of,422
Stockinvestments,
732-734
StrategicFinance,1,7
Sunkcosts.A pastcostthat cannotbe
changedregardlessof which future
actionis taken,70,4'1,6
Supplychain management.
Exchange
of information with suppliers to
reduce costs,improve quality and
speeddeliveryof goodsand services
form suppliersto the companyitself
and on to customers
, 22,257

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

Glindex G. l1

Throughput tirne. The time between

buying raw materials and selling
finishedproducts,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 operationsto interest
expense.Measuresthe 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,to units completed,
181-183,1.92-1.93
calculationof,72-73
, relevantrangeand, 311,-31,3
summaizing,in processcosting,
.
1,80-181,192
Total expenseline, 371
Total fixed costs,307
Total mixed costs,309
Total quality management(TQM). A
philosophyof delightingcustomersby providingthem
with superiorproductsand
services.
Requiresimproving
quality and eliminating
defectsand wastethroughout
the value chain,22-24,
258-262
Total variablecost,304
Trace.To assigna directcostto a cost
object,53
Trading on equity. Earning more
income on borrowed money than
the relatedinterestexpense,thereby
increasingthe earningfor the owners of the business.Also called
I

r ^^

levefage) / 5z

Traditional production systems,

255, 256
Training,667
Transferred-in costs. 188

Treasurer. The position responsible

for raising the firm's capital and
investing funds, 7

Variance. The difference between an

actual amount and the budget, 597.
Seealso specific types

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

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

Uncontrollablecosts.Coststhat cannot be changedor influencedin the

shortrun by management,6S-69
Underallocatedmanufacturingoverhead. The manufacturingoverhead
allocated to \Work in Process
Inventoryis lessthan the amount of
manufacturingoverheadcostsactually incurred,128
Unethicalbehavior,vs. illegal
behavior,14
Unit budgets,rollingup, 557-558
Unit contributionmargin,362-363,
366,369,379
Unit costs,1.83,1.95
Unit managers,motivation of,670
Unit variablecosts,424

Wasteelimination,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 calculationsto representthe
return that investorsand long-term
creditorsexpect,688
Weighted-average
methodof process
costing,175
Wholesaler.Merchandisingcompaniesthat buy in bulk from manufacturers,mark up the prices,and then
sellthoseproductsto retailers,47
Work in processinvenfory.Goodsthat
are partwaythrough the manufacturing processbut not yeycomplete,48
Working capital. Current assets
minus current liabilities;measuresa
business's
ability to meetits shortterm obligationswith its current
assets,725

V
Vacation benefits, 58
Value chain. the activities that add
value to a firm's products and services.IncludesR&D, design,production or purchases,marketing, distribution, 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

Volume, affect of, in costs, 302-31,4

x
X variable ! coefficient.322

z
Zero profit. SeeBreakevenpoint