Fundamentals of Management Accounting cheat sheet

Key terms

Cost

The amount of resource, usually expressed in money, given up or sacrificed to acquire or produce a good or service.

Cost unit/object

The unit of product, service, or activity for which a cost is separately measured, a unit produced, an order, a department, or a contract.

Cost accounting

The process of recording, classifying, allocating and reporting costs, chiefly to determine the cost of a product, service or activity.

Cost accountant

A professional responsible for recording, analysing and reporting on the costs an organisation incurs.

Management accounting

The wider process of identifying, measuring, analysing and communicating financial and operating information to help managers plan, control and make decisions, of which cost accounting is one part.

Management accountant

A professional who prepares and interprets management accounting information to support managers' planning and decision making.

Cost centre

A location, function, or item of equipment for which costs are accumulated and separately controlled.

Profit centre

A segment of a business whose manager is accountable for both the revenue it earns and the costs it incurs, and therefore for its profit.

Responsibility centre

Any organisational unit whose manager is held accountable for its performance, a cost centre, profit centre, revenue centre or investment centre depending on what the manager controls.

Executives

Use management accounting information for strategic decisions, resource allocation, and evaluating overall organisational performance.

Production managers

Use cost data (see the chapter on accounting for materials, labour and overheads) to control material, labour and overhead costs within their department, and to assess production efficiency.

Sales managers

Use cost and contribution information (see the chapter on break-even analysis) to guide pricing, product mix and sales targets.

Employees

Use budget and performance information where it affects their targets, bonus schemes or job security.

Cost control

The process of regulating actual costs against a predetermined standard or budget, to keep spending within an accepted level, a continuous, corrective activity.

Cost reduction

The deliberate, planned effort to permanently lower the cost of a product or service without impairing its quality or suitability, a one-off improvement in the cost itself.

Competence

Maintain the professional knowledge and skill needed to provide a competent service, and act diligently in accordance with applicable technical and professional standards.

Confidentiality

Respect the confidentiality of information acquired through professional and business relationships, and not disclose or use it without proper authority.

Integrity

Be straightforward and honest in all professional and business relationships.

Credibility

Provide information that is reliable and relevant, so that it can be trusted and depended on by the users it is prepared for.

Functions

Classifies cost by the business function that incurs it: production, administration, selling and distribution, and finance costs.

Behaviour

Classifies cost by how it responds to a change in activity level:

Nature of expense

Classifies cost by the type of resource consumed: materials, labour, or expenses.

Relation to cost centre or cost unit

Classifies cost as:

Time

Classifies cost as historical (actual cost already incurred) or predetermined (a standard or budgeted cost estimated in advance, for control purposes).

Costs for management decision making

Classifies cost as relevant (a future cost that differs between the decision alternatives being compared) or irrelevant (unaffected by the decision, sunk costs), and as controllable or uncontrollable by a given manager.

Nature of production or process

Classifies cost by the production method used to accumulate it, job costing, batch costing, process costing or service costing (each covered in the chapter on costing methods).