Accounting Midterm Vocab #1

Operating Assets

Assets that the firm uses in the generation of its day to day revenues. Examples include accounts receivable and inventory

Net Operating Income (NOI)

Revenues minus all expenses, both fixed and variable

Contribution Margin

Revenues minus all variable costs

Return on Investment (ROI)

A performance measure that shows what percentage of firm, division, or project's investment in assets translates into operating income

Investment Center

A responsibility center who's manager's decisions influence revenues, costs, and/or investment and assets

Profit Center

A responsibility center whose manager's decisions influence revenues and costs; they do not have decision-making power over investment in assets

Unit fixed cost

A unit cost that decreases as the firm produces and sells more products (i.e. as slaes volume increases)

Unit Variable Cost

A unit cost that remains the same as the firm produces and sells more products (I.e. as sales volume increases)

Manufacturing Overhead (MOH)

Any manufacturing cost that is not direct materials or direct labour

Cost Object

Anything the firm wants to determine the cost of

Non-operating Assets

Assets that are part of the firm, but which either do not contribute to its operations (i.e. investments in other firms) or are not currently employed and its operations (i.e. idle buildings)

Direct Cost

A cost that can be easily and cost-effectively traced to its cost object

Indirect Cost

A cost that cannot be directly and/or cost-effectively to its cost object

Fixed Cost

A cost that does not change as the sales volume increases

Variable Cost

A cost that increases as more products are sold (I.e. as sales volume increases) and is zero when zero products have been sold

Mixed Costs

A cost that increases as the sales volume increases and is greater than zero when zero products have been sold

Manufacturing Cost

A cost that is caused by the production processes of a firm. If the firm discontinued its production processes, these costs would be eliminated

Nonmanufacturing Cost

A cost that is not related to the production processes of the firm. If the firm discontinued its production processes, these cost would be continued to be incurred

Departmental Overhead Rates

A group of predetermined overhead rates that are determined and used to allocate overhead to cost objects. One POHR is determined and used for each department that contributes to the manufacture of the cost object

Fixed Manufacturing Overhead (FMOH)

A manufacturing overhead cost that does not change as the number of units produced and sold increases

Variable Manufacturing Overhead (VMOH)

A manufacturing overhead cost that increases as the firm produces and sells more units

Margin (aka Return on Sales)

A measure of how efficiently the firm converts revenues into operating income

Turnover (aka Investment Turnover)

A measure of how much revenue is generated from a $1 investment in operating assets

Job Costing

A method of assigning costs to a cost object in which each cost object is importantly different from each other cost object

DuPont Analysis

A method of decomposing return on investment into its component parts to make it clear how the actions of managers lead to changes in ROI

Cost Brand Pricing

A method of determining selling prices in which the selling price of a product is based on its total cost to manufacture

Markup Percentage

A percentage of a cost object's total cost which is added to its total cost to arrive at a selling price for the cost object. Price = Cost x (1 + Markup Percentage)

Residual Income (RI)

A performance measure that shows how much operating income a firm, division, or project earns over its opportunity cost

Indirect Materials Cost

Cost of physical objects that are used in the manufacture of products, but for which it is either too difficult or not cost-effective to trace them directly to their cost objects. An example would be glue used to construct a desk

Direct Materials Cost

Cost of physical objects that can be traced directly to their associated cost objects

Direct Labour Cost

Cost of wages paid to individuals who are directly responsible for the creation of products or services

Indirect Labour Cost

Cost of wages paid to individuals who support the production process, but are not directly involved in the creation of products or services

Net Income

Operating income minus taxes and/or interest

Allocation Base

Something that the firm uses to apply overhead. Must have as close to a cause-and-effect relationship with overhead costs as possible. Popular examples include direct labor hours, machine hours, and direct labor costs

Sales Mix

The amount a firm sells of each of its products relative to each of its other products. In other words, what proportion of the firms total sales each product makes up

Revenue

The amount of money collected by the firm during a specified period as a result of its operating activities. Synonymous with sales

Revenues

The amount of money collected by the firm during a specified period as a result of its operating activities. Synonymous with sales

Break Even Revenue

The amount of revenue at which the firm earns a net operating income of $0

Unit Contribution Margin

The contribution margin for one product. Calculated by dividing the total contribution margin by the number of products sold

Margin of Safety

The cushion a firm has between their budgeted (or actual) sales and the break even point. This can be expressed either as a dollar amount or number of units

Controllability Principle

The idea that managers should only be compensated on outcomes generated by actions that could influence

Margin of Safety Percentage

The percentage of the firms budgeted (or actual) sales made up by the margin of safety

Break Even Point

The point at which revenues equal total cost. This can be expressed as either an amount of revenue (I.e. a dollar amount) or a number of units sold

Allocation (or application) of Overhead

The process by which indirect costs (I.e. overhead) are assigned to cost objects

Contribution Margin Ratio (or Percentage)

The proportion of the unit sales price that is made up by the unit contribution margin. Also, the proportion of revenue that is made up by the contribution margin

Predetermined Overhead Rate (POHR)

The rate at which manufacturing overhead is applied to cost objects. Equivalently, the unit cost of manufacturing overhead. Calculated by dividing the total estimated manufacturing overhead cost by the total estimated usage of the allocation base

Break Even Sales Volume

The sales volume at which the firm earns a $0 net operating income

Relevant Range

The span of sales over which a fixed cost remains fixed or a variable. Equivalently, the span of sales over which costs assumptions remain true

Cost

The value of a resource that must be paid, used up, or forgone in order to obtain some other resource