Terminologies of Management Accounting

Prepared by

Rahat-Al-Islam

1. Management: Management is the process of reaching organizational goals by working with and through people and other organizational resources. 2. Accounting: Accounting is an information system that identifies records and communicates the economic events of an organization to interested users. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decision by the users of the information. (AAA) 3. Cost: Cost is the sacrifice or outflow of all assets with the amount which have to pay (A/P) for getting a benefit or asset. An amount paid or required in payment for a purchase Cost = Expenditure + A/P 4. Costing: Costing is the process of calculating the cost. 5. GAAP: Generally Accepted Accounting Principle (GAAP) is the common set of accounting principles, standards and procedures that companies use to compile their financial statement. 6. Financial Accounting: The field of accounting that provides economic and financial information for invertors, creditors and other external users. 7. Managerial Accounting: The field of accounting that provides economic and financial information for managers and other internal users. Managerial accounting is the accounting which collects information from financial accounting and then analysis the information. 8. Cost Accounting: Cost accounting is the process of recording, ascertaining and analysis the cost involves in running a business. 9. Financial Statement: Financial statement is the formal record of the financial activities of a business, person or other entity. 10. Balance Sheet: A financial statement that reports the assets, liabilities and owners equity of a company at a specific period. It shows the financial position of an enterprise on a particular date. 11. Income Statement: A financial statement that presents revenues and expenses and resulting net income and net loss of a company for a specific period of time.

12. Cash Flow Statement: A financial statement that summarizes the information about cash inflows and cash outflows of a company for a specific period of time. 13. Variable cost: Variable costs are expenses that changes in proportion in the activity of a business. The cost which is variable in total but fixed in units is the variable cost. 14. Fixed Cost: Fixed costs are expenses that are not dependent on the level of goods or services produced by the business. The cost which is fixed in total but variable in units is the fixed cost. 15. Mixed Cost: Mixed cost is the combination of both variable and fixed cost. Ex: Electricity bill. 16. Differential Cost: Differential cost is the difference between the cost of two alternative decisions, or of a change in output level. 17. Opportunity cost: Opportunity cost is the possible benefit from taking the second best alternatives. 18. Out of pocket cost: Out of pocket cost is the direct outlays of cash which may or may not be later reimbursed. 19. Sunk cost: A cost that has already been incurred and thus can not be recovered. Sunk costs are independent of any event that may occur in the future. 20. Relevant cost: It is a managerial accounting term that is used to describe costs that are specific to management decisions. 21. Revenue: The amount of money that a company actually receives during a specific period, including discounts and deduction of returned merchandise. 22. Expense: The economic cost that a business incurs through its operations to earn revenue on a particular accounting period. 23. Committed fixed cost: Committed fixed costs are those fixed cost that are difficult to adjust and that relate to the investment in the facilities, equipments, and the basic organizational structure of a firm. 24. Discretionary fixed cost: Discretionary fixed costs are those fixed cost that arises from annual decisions by management to spend in certain fixed cost areas. Ex: Advertisement, Research. 25. CVP analysis: Cost-volume-profit is a form of cost accounting. It is used to determine how changes in cost and volume affect companies operating income and net income.

26. Contribution margin: Contribution margin is the marginal profit per unit sale. Contribution margin = Revenue Variable cost 27. Contribution margin ratio: Contribution margin ratio is the percentage of contribution over total revenue. Contribution margin ratio = Contribution margin/revenue 28. Break-even point: Break even point is the point where the cost or expenses and revenue are equal. 29. Margin of safety: The margin of safety is a tool to help management understand how far sales could change before the company would have a net loss. Margin of safety = Budgeted or forecasted sales break even sales 30. Sales mix: A sales mix is the proportion of sales coming from different product or service. 31. Operating leverage: A magnification of profits (EBIT, or net operating income) that results from having fixed operating costs in the company. Degree of operating leverage = Contribution margin/ Net operating income 32. Ratio: The qualitative relationship between two similar magnitudes determined by the number of times one is contained in the other. It is a fraction of two similar or related quantities in which the numerator is measured with reference to (as a fraction of) denominator. 33. Horizontal analysis: Is the proportion change over a period of time. It is especially useful in evaluating a trend situation because absolute changes are often deceiving. 34. Vertical analysis: Is the proportional expression of each item on a financial statement in a base figure. 35. Earning per share: The portion of a companys profit allocated to each outstanding share of common stock. It measures income earned on each share of common stock. It is a profitability ratio. EPS = (Net income-Proffered dividend)/Weighted share outstanding 36. Price earning ratio: A valuation ratio of a companys current share price compared to its per share earnings. It is a profitability ratio. Price earning ratio = Market value per share/Earning per share

37. Dividend pay out and yield ratio: The percentage of earnings paid to shareholders in dividends. It is a profitability ratio. Dividend pay out or yield ratio = Dividend/Net income 38. Financial leverage: The use of fixed financing costs by a firm. Degree of financial leverage = % change in EPS/% change in EBIT 39. Book value per share: It measures the amount each share would receive if the company were liquidated at the amounts reported on the balance sheet. Book value per share = Common stock holders equity/Outstanding share 40. Turnover: Turnover is the act of turning over, an upset or overthrow. 41. Time interest earned ratio: It is a solvency or coverage ratio. It measures the ability to meet interest payments that come due. Time interest earned ratio = EBIT/Total interest 42. Debt to equity ratio: It is a solvency or coverage ratio. It measures the percentage of total assets provided by creditors. Debt to Equity ratio = Total asset/Total equity 43. Non cash balance sheet account: An item such as accruals that occurs on a balance sheet and is not a receipt of actual money. 44. Operating activities: An activity that directly affects an organizations cash inflows and outflows, and determine its net income. 45. Investing activities: Deal or transactions involving sale or purchase of equipment, plant, property, security, and other assets generally not held for immediate sale. 46. Financing activities: The initiatives, transactions, and events (such as issuing of stock, share, bonds, promissory note, and arranging of loans and supplies) employed and undertaken by an organization in achieving its economic objectives. 47. Common fixed cost: A common fixed cost is a fixed cost that supports the operations of more than one segment, but is not treatable in whole or in part of any one segment. 48. Avoidable fixed cost: Avoidable fixed cost is the fixed cost that can be avoidable by choosing one alternative over another.