Absorption Costing – assigns all manufacturing costs to the product.

Fixed OH is treated as product cost

Variable Costing – assigns only variable manufacturing costs to the products. Important managerial tool
for internal application

Absorption Variable
Costing Costing
DM
DM
Produc DL
DL
t Costs VOH
VOH
FOH
Period FOH
S&E Expenses
Costs S&E Expenses

Production > Sales Absorption Income > Variable Income

Production < Sales Absorption Income < Variable Income
Production = Sales Absorption Income = Variable Income

Segment – subunit of a company of sufficient importance to warrant the production of performance

reports

Direct Fixed Expenses – fixed expenses directly traceable to the segment

Common Fixed Expenses – fixed expenses not directly traceable to the segment

Segment Margin – profit contribution each segment makes toward covering a firm’s common fixed
expenses

Ordering Costs – costs of placing and receiving an order

Carrying Costs – costs of keeping and storing inventory

Stockout Costs – costs of not having a product available when demanded by a customer

Economic Order Quantity – number of units in the optimal size order quantity that minimizes the total
cost

Reorder Point – point in time when a new order should be placed

Lead Time – time required to receive the economic order quantity once an order is placed or a setup is
started

Safety Stock – extra inventory carried to serve as insurance against changes in demand

Just-In-Time Approach – maintains that goods should be pulled through the system by present demand
rather than being pushed through on a schedule based on anticipated demand

Total Inventory Related Cost=Ordering Cost +Carrying Cost

OrderingCost =¿ of orders per year ×Cost of Placing an Order
Units∈Order
Average Number of Units∈Inventory=
2
CarryingCost = Average ¿ of Units∈Inventory ×Cost of Carrying OneUnit ∈Inventory
( Maximum Amount−Minimum Amount)
Average Inventory=
2
Reorder Point=Rate of Usage × Lead Time
Safety Stock= ( Maximum Daily Usage− Average Daily Usage ) × Lead Time
 CO=Cost of placing one order
D=Demand
√
Economic Order Quantity= 2×CO ×
D
CC CC=Carrying cost of one unit
Budget – financial plans for the future and a key component of planning

Strategic Plan – plots direction for an organization’s future activities and operations

Planning – looking ahead to see what actions should be taken to realize particular goals

Control – comparing actual results with budgeted results

Master Budget – comprehensive financial plan for the organization as a whole

Continuous Budget – moving 12-month budget

Budget Committee – reviews the budget, provides policy guidelines and budgetary goals

Budget Director – the person responsible for directing and coordinating the organization’s overall
budgeting process

Operating Budget – describes the income-generating activities of a firm

Financial Budget – details the inflows and outflows of cash and the overall financial position

Sales Budget - detailed schedule showing the expected sales for the budget period

Bottom-up Approach – requires individual salespeople to submit sales predictions

Production Budget – lists the number of units that must be produced to satisfy sales needs and to
provide for the desired ending inventory

DM Purchases Budget - details the raw materials that must be purchased to fulfill the production budget
and to provide for adequate inventories.

DL Budget - shows the direct labor-hours required to satisfy the production budget

OH Budget - lists all costs of production other than direct materials and direct labor

S&E Expenses Budget - lists the budgeted expenses for areas other than manufacturing

Ending Finished Goods Inventory Budget - cost of unsold units is computed on the ending finished goods
inventory budget

COGS Budget – reveals the expected COGS

Cash Budget - detailed plan showing how cash resources will be acquired and used

Budgeted BS

Goal Congruence – alignment of managerial and organizational goals

Dysfunctional Behavior – individual behavior that is in the basic conflict 3with the goals of the
organization

Incentives – means an organization uses to influence a manager to exert effort to achieve an

organization’s goal

 Monetary Incentives
 Nonmonetary Incentives

Participative Budgeting – allows subordinate managers considerable say in how the budgets are
established

Budgetary Slack – exists when a manager deliberately underestimates revenue or overestimating costs

Pseudoparticipation – top management assumes total control of the budgeting process, seeking only
superficial participation from lower level managers

Controllable Costs – costs whose level a manager can influence

Myopic Behavior – occurs when a manager takes action that improve budgetary performance in the
short run but bring long term harm to the firm

Units¿ be Produced=Expected Unit Sales+ Desired EI Units−BI Units

Purchases=DM needed + DM ∈Desired EI− DM ∈BI
Cash Available=BeginningCash Balance + Expected Cash Receipts
Ending Cash Balance=Cash Available−Expected Cash Disbursements