GLOSSARY OF ACCOUNTING TERMS

Adapted from the Glossary prepared for the B655 Course Team by Peter Clarke, Euan Henderson, Glenna White, Alan Parkinson and Richard Wheatcroft. This version was prepared for B800 by Richard Wheatcroft. This Glossary brings together some of the more important and relevant technical accountancy terms introduced in the course. Terms picked out in bold within definitions are themselves defined elsewhere in the Glossary. Some of the terms in this Glossary do not appear in the course materials but are included for wider reference purposes. Acknowledgements The Open University is indebted to the Chartered Institute of Management Accountants (CIMA) and the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited for permission to reproduce definitions from their official terminology. A ABSORPTION COSTING: The procedure that charges fixed as well as variable overheads to cost units. (CIMA definition) The term may be applied where production costs only, or all functions, are so allotted. See overheads, fixed costs and variable costs. ACCOUNT: A structured record of monetary transactions, kept as part of an accounting system. It may be kept in a ledger or on a computer file and relates assets, liabilities, revenues and/or expenses. ACCOUNTING RATE OF RETURN: Ratio sometimes used in investment appraisal, based on profits as opposed to cash flows. Not a recommended measure. (Based on CIMA definition.) ACCRUAI.S CONCEPT/CONVENTION: The concept that revenues and costs are matched one with the other and dealt with in the profit and loss account of the period to which they relate, irrespective of the period of receipt or payment. (CIMA definition) To accrue an amount is to enter it in the

accounts in accordance with the accruals concept. Also known as the matching concept/convention. ACCRUED EXPENSES: Costs relating to a period which have not yet been taken into account because They have not yet been invoiced by the supplier or paid. These will include such items its electricity and telephone calls, which are generally invoiced in arrears. ACID TEST: See quick ratio and liquidity ratio. ACTIVITY-BASED COSTING (ABC): Cost attribution to cost units on the basis of benefit received from indirect activities. (C1MA definition) ADDED VALUE: The increase in realizable value resulting from an alteration in form, location or availability of a product or service, excluding the cost of purchased materials and services. Note: Unlike conversion cost, added value includes profit. Also known as value added. APPORTIONING: See cost apportionment. APPORTIONMENT: See cost apportionment. ASSET TURNOVER: See asset utilization ratio. ASSET UTILIZATION RATIO (AUR): A ratio indicating the turnover generated by each E1 of assets, or the number of times assets are turned over in the year. Sometimes called asset turnover. ASSETS: Resources of value owned by an organization. See also fixed assets and current assets. ATTRIBUTION: See cost attribution. AVERAGE COST (AVCO): A method of pricing the issue of material using the average purchase price of the units in stock. AVOIDABLE COSTS: The specific costs of an activity or a sector of an organization that would be avoided if that activity or sector did not exist. See also relevant costs. B BAD DEBT: A debt that it is known, assumed or expected will not be settled. It is normally written off as a charge to the profit and loss account.

BALANCE SHEET: A statement of the financial position of an organization at a given date, disclosing the value of the assets, liabilities and accumulated funds such as shareholders' contributions and reserves, which is prepared to give a true and fair view of the state of the organization at that date. (Based on CIMA definition.) BREAK EVEN: The level of activity (e.g. level of sales in a period) at which the organization makes neither a profit nor a loss, as its total costs exactly equal its total income. BREAK-EVEN ANALYSIS: The analysis of points at which sales equal total cost for various levels of output, prices, etc. BREAK-EVEN CHART: A chart indicating profit or loss arising at different levels of sales volumes within a limited range. BREAK-EVEN POINT: See break even. BUDGETING: The preparation of financial plans, based on the organization's objectives, for a future period (usually a year). The constituent budgets may relate to costs, revenues, working capital movements, capital expenditure and cash flow(s). C CAPITAL ALLOWANCES: Deductions from profit allowed by the Inland Revenue for the cost of recent capital expenditure on fixed assets; these replace an organization's depreciation charge in calculating taxable profit. CAPITAL AND RESERVES: As a composite term, the investments made by shareholders comprising direct capital investment and retained profits, belonging to shareholders, not distributed but invested on their behalf by management. CAPITAL EMPLOYED: The funds used by an organization for its operations. (CIMA definition) Net capital employed is often used to describe the longterm and semi-permanent funds in the organization (i.e. issued share capital, reserves and long-term loans, but excluding current liabilities). CAPITAL EXPENDITURE: Expenditure on fixed assets (in contrast with revenue expenditure) intended to benefit future accounting periods or expenditure that increases the capacity, efficiency, life span or economy of an existing fixed asset. (Based on CIMA definition.) CASH BUDGET: A budget showing the pattern, from period to period, of:

 cash flow into the organization (receipts) cash flow out from the organization (payments) the resultant effect on bank balances or overdrafts. CASH FLOW: The difference between cash generated and cash spent in a period. Cash flows differ from profit flows not least because of the application of the accruals or matching concept/convention. CASH FLOW STATEMENT: A statement listing the inflows and outflows of cash. It normally details such flows for day-to-day items and capital items within a particular period. It may be a projection (cash flow forecast) or historical. COMMITTED COSTS: Those costs, planned for a relatively long time-span, that cannot be eliminated or even cut back without having a major effect on profits or the organization's objectives. COMMON FIXED COSTS: Those fixed costs that are related to all or several of the organization's segments (products, product groups, markets, services, etc.) and cannot therefore be identified uniquely with any particular segment. CONSERVATISM CONCEPT/CONVENTION: See prudence concept/ convention. CONSISTENCY CONCEPT/CONVENTION: The principle that there is uniformity of accounting treatment of like items within each accounting period and from one period to the next. (CIMA definition) CONSOLIDATION: The aggregation of the constituent financial statements of group companies as if they were the accounts of a single organization. CONTINUOUS BUDGET: See rolling budget. CONTRIBUTION: The difference between sales value and the variable cost of those sales, expressed either in absolute terms or as a contribution per unit or as a percentage of sales. (Based on C1MA definition.) CONTRIBUTION COSTING: See marginal costing. CONTRIBUTION RATIO: See contribution to sales ratio.

CONTRIBUTION TO SALES RATIO: The relationship between revenue and the contribution that it generates. For example, if a product sells for 10 and generates 3 contribution, its contribution to sales ratio is 30%. Also known as the contribution ratio and the profit/volume ratio. CONTROLLABLE COSTS: A cost, chargeable to a budget or cost centre, that can be influenced by the actions of the person who controls the centre. (Based on CIMA definition.) Also known as managed costs. CONTROL PERIOD: A period (commonly four weeks or one month) during which actual performance is compared against budget for control purposes. CONVERSION COST: The cost of converting material into finished products, i.e. the sum of direct labour costs, direct material costs and production overhead costs. (CIMA definition) COST ALLOCATION: That part of cost attribution that charges a specific cost to a cost centre or cost unit. (CIMA definition) COST APPORTIONMENT: That part of cost attribution that shares costs among two or more cost centres or cost units in proportion to the estimated benefit received, using a proxy such as square metres. (CIMA definition) COST ATTRIBUTION: The process of relating costs to cost centres or cost units using cost allocation or cost apportionment. COST CENTRE: A location, a function or an activity group for which costs may be ascertained and related to cost units for control purposes. COST DRIVER: An activity that generates cost. Particularly related to activity-based costing. COST OF GOODS SOLD (COGS): See cost of sales. COST OF SALES (COS): The sum of direct costs or variable costs of sales plus factory overheads attributable to the turnover. In management accounts this may be referred to as a production cost of sales or cost of goods sold. (Based on CIMA definition.) COST-PLUS PRICING: A method of pricing in which the cost of one unit is computed (using absorption costing or marginal costing) and then a percentage mark-up is added. COST UNIT: A unit of product or service liar which costs are ascertained. (Based on CIMA definition.)

COST-VOLUME-PROFIT (CVP) ANALYSIS: Study of the relationship between variable costs per unit, total fixed costs, level of output, and price and mix of products sold, and the effect of changes in these upon profit. CREDIT: An entry in an organization's accounts. A decrease in the organization's assets or an increase in its liabilities. CREDITOR: A person or an organization to whom money is owed. (CIMA definition) Generally, the term is applied to those whose invoices will be paid within a short period of time, such as suppliers (trade creditors). Those to whom longer-term debts (such as long-term loans) are owed are often described as creditors amounts falling due after one year. CREDITORS' TURNOVER: A ratio that relates the total money owed to creditors (generally suppliers) at a particular date to the current rate of purchase of the goods and services supplied. This is normally expressed in calendar days, indicating the average time taken to pay for goods and services bought on credit. CURRENT ASSETS: Cash or other assets (e.g. stocks, debtors, short-term investments) that are likely to be converted into cash in the normal course of trading. (Based on CIMA definition.) CURRENT COST ACCOUNTING (CCA): A system of accounting based on a concept of capital that is represented by the net operating assets of an organization. These net operating assets (fixed assets, stocks and monetary working capital) are the same as those included under historic cost accounting, but in the current cost accounts the fixed assets and stocks are normally expressed at current price levels. The objective of current cost accounts is to provide guidance for management, shareholders and others on such matters as the financial viability of the organization and distribution decisions. CURRENT LIABILITIES: Liabilities that all organizations would normally expect to settle within a relatively short period (normally one year), e.g. creditors, dividends and tax due for payment; also that part of a long-term loan due for repayment within one year. CURRENT RATIO: One of two common working capital solvency ratios (the other being the quick ratio or acid test or liquidity ratio). This one is an overall test of liquidity, measuring whether or not current assets will remain after current liabilities have been paid off. D

DEBENTURE: A particular form of long-term loan. DEBIT: An entry in an organization's accounts. An increase in the organization's assets or a decrease in its liabilities. DEBTOR: A person or an organization who owes money to the organization. Primarily, customers who have yet to pay for goods or services provided. DEBTORS' TURNOVER: A ratio that relates the total money owed by debtors (generally customers) at a particular date to the current rate of sale of the goods or services purchased. This is normally expressed in calendar days, indicating the average time taken to pay for goods and services bought on account. DECLINING BALANCE DEPRECIATION: A method of depreciation, applying a constant percentage (determined by management) to the periodend net book value of a fixed asset over its useful life. Also known as reducing balance. DEPRECIABLE BASE: The cost of an asset less any anticipated resale or residual value. The resulting figure is then depreciated over the useful life of the asset. DEPRECIATION: The internal charge made by an organization against its revenue, to provide for the use and/or progressive deterioration/obsolescence of its fixed assets within operations. This is an example of the matching concept/ convention. DIRECT COSTS: Costs that can be traced directly to units of production (or other activity of the organization). Typically, these may include materials used, production labour and certain production expenses. DIRECT FIXED COSTS: Those fixed costs that are uniquely incurred in an identifiable segment (product, product group, service, market, etc.) of the organization's activities. DIRECT LABOUR: That part of an organization's work force directly concerned with the manufacture of goods or the provision of services. DIRECT LABOUR COST PERCENTAGE RATE: A method of charging overheads to cost centres. Calculated by dividing the budgeted or estimated overhead costs attributable to a cost centre by the amount of direct labour cost expected to be incurred (or which would relate to working at normal capacity) and expressing the result as a percentage.

DIRECT LABOUR HOUR RATE: A method of charging overheads to cost centres. Calculated by dividing the budgeted or estimated overhead costs attributable to a cost centre by the number of direct labour hours expected to be worked (or which would relate to working at normal capacity). DIRECT MATERIAL PRICE VARIANCE: The difference between the normal direct material cost of the actual production volume and the actual cost of direct material. DIRECT MATERIAL USAGE VARIANCE: The difference between the normal quantity specified for the actual production and the actual quantity used, at normal purchase price. Also known as the material quantity variance. DISCOUNTED CASH FLOW (DCF): An evaluation of the future net cash flows generated by a capital investment project, by discounting them to their present-day value. (Based on CIMA definition.) DIVIDEND: A distribution made to shareholders in proportion to the number of shares that they hold, generally from post-tax profits. An 'interim' dividend is paid half yearly, the 'final' dividend at the year end. DOUBLE-ENTRY ACCOUNTING: The principle of ensuring that the monetary value of any transaction is recorded so that the balance sheet remains in balance. DOUBLE-ENTRY BOOKKEEPING: The recording of the monetary value of transactions and their impact within the accounting records of an organization. The recording system reflects the need for at least two entries for the balance sheet to remain in balance. E EARNINGS: Generally the post-tax profits of an organization which, in effect, belong to the shareholders either to take out (dividends) or to leave in (reserves). EARNINGS PER SHARE (EPS): An investors' ratio calculated as: Earnings for the year Number of shares in issue EXPENSES: Expenditures that are chargeable to the trading activities of an accounting period.

F FINANCIAL ACCOUNTING: Reporting how the organization has performed in the recent past, principally for the benefit of 'outsiders' through the organization's financial statements. The work of financial accountants. FIRST IN, FIRST OUT (FIFO): A method of pricing the issue of material using, first, the purchase price of the oldest unit in stock. (CIMA definition) FIXED ASSETS: Those assets that would normally remain in the organization to enable it to carry on its business (e.g. plant and machinery, vehicles, property) for longer than a year. Also called long-lived assets. FIXED BUDGET: A budget that is designed to remain unchanged irrespective of the level of output or turnover attained. FIXED COSTS: Costs that do not vary as the level of activity varies (e.g. if sales doubled many administrative costs would be unaffected and thus would be regarded as fixed). FLEXIBLE BUDGET: A budget that, by recognizing the differences in behaviour between fixed costs and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of employees, is designed to change appropriately with such fluctuations. (Based on CIMA definition.) Also known as the variable budget. FUNDS FLOW STATEMENT: One of an organization's financial statements which shows the way in which funds have been generated and used by the organization and how any resulting surplus of liquid assets has been applied or any deficiency financed. It provides a link between the balance sheet at the start of the period, the profit and loss account for the period, and the balance sheet at the end of the period, and forms part of the audited accounts of the company. Also known as the source and application of funds statement. G GEARING: The relationship between the different sources of capital (in monetary terms) comprising the total capital employed of an organization. For example, an organization with, say, over 50 per cent of its capital originating from external sources such as bank loans could be termed highly geared. Conversely, the higher the proportion of shareholders' funds the lower the gearing. Also known as leverage.

GOAL CONGRUENCE: The situation in which each individual, in attempting to satisfy his or her own interests, is also making the greatest contribution to the objectives of the enterprise. GOING CONCERN CONCEPT/CONVENTION: The assumption, in producing the financial statements, that the organization will continue for the foreseeable future. GOODWILL: An intangible asset that appears on some balance sheets under fixed assets. Generally the difference between the price paid for the purchase of a subsidiary company and the book value of the subsidiary. May be expressed (CIMA definition) as the difference between the value of an organization as a whole and the aggregate of the fair value of its separable identifiable assets. GROSS MARGIN: See gross profit margin. GROSS PROFIT: Sales revenue less cost of sales, but before deduction of overheads such as selling costs, administration costs and financial costs. GROSS PROFIT MARGIN: The difference between sales and the cost of goods or services sold. Also known as the gross margin. H HISTORIC COST ACCOUNTING: A method of accounting that does not make allowance for the effects of inflation. A system of accounting in which all values (in revenue and capital accounts) are based on the costs actually incurred or as revalued from time to time. HOLDING COSTS: The cost of holding stocks, which may include the costs of interest paid or lost, deterioration costs, pilferage costs, storage costs, insurance costs and obsolescence costs. I INDIRECT COSTS: Costs that cannot be directly traced to units of production (or other activity of the organization). Typically, these may include property costs, administration costs and selling costs. Also known as overheads. INTANGIBLE ASSET: An asset that does not have a physical identity, e.g. trademark, patent, goodwill. INTERNAL RATE OF RETURN (IRR): The rate of return at which the cost of a capital investment project and its future cash flows balance out.

INVESTMENT: Expenditure by an organization in anticipation of obtaining a return at some future time. INVESTMENT APPRAISAL: The use of accounting and mathematical techniques to establish the likely returns from particular investment projects; particularly applied to cash flows. IRRELEVANT COSTS: Costs that are irrelevant to a particular decision because they will be unaffected by that decision. (Costs can be irrelevant to one decision but relevant to another. See relevant costs.) ISSUED SHARE CAPITAL: Shares actually issued and held by shareholders. Normally, in the UK, the face value (par value, nominal value) of the shares of an organization that have been issued are recorded at face value, regardless of what price they realized when sold or what price (for public companies) they are currently attracting. L LABOUR EFFICIENCY VARIANCE: The difference between the standard hours for the actual production achieved and the hours actually worked, valued at the standard labour rate. LABOUR RATE VARIANCE: The difference between the standard and the actual direct labour rate per hour for the total hours worked. LAST IN, FIRST OUT (LIFO): A little used method of pricing the issue of material using the purchase price of the latest unit in stock. (CIMA definition) LEAST-SQUARE METHOD: A mathematical technique for finding the straight line that best fits a series of points on a graph. LEVERAGE: See gearing. LIABILITIES: The financial obligations of an organization both internal (e.g. to shareholders) and external (e.g. to creditors, debenture holders and, in the case of a bank loan or overdraft, to a bank). (Based on CIMA definition.) LIMITED COMPANY: An organization which, in the eyes of the law, is a separate entity, apart from its shareholders. The shareholders' liability to third parties in the event of company failure is limited to their capital contributions and any reserves owed to them.

LINEAR PROGRAMMING: A series of mathematical calculations used to find the optimum combination of a number of factors through the construction of a model. Often used in examining the most profitable use of scarce resources within an organization. LINEARITY: The assumption by accountants and managers that revenues and costs vary in strict proportion to the level of activity. LIQUID ASSETS: Current assets that are in the form of cash, or that can rapidly be converted into cash. Generally, stocks are not regarded as liquid assets. LIQUIDITY: The level of cash and assets readily convertible to cash, relative to the expected calls to be made on them (i.e. relative to current liabilities). This may be expressed as the liquidity ratio (or quick ratio or acid test). LOANS: See overdrafts and loans. LONG-LIVED ASSETS: Assets which, when purchased, are expected to have a useful life of more than one year. Also known as fixed assets. LONG-TERM LIABILITY: A liability that does not have to be met within one year. LONG-TERM LOAN(S): See overdrafts and loans. M MACHINE HOUR RATE: A method of charging overheads to cost centres. Calculated by dividing the budgeted or estimated overhead costs attributed to a machine or group of similar machines by the appropriate number of machine hours (the number of hours for which the machine or group of machines is expected to be operated, the number of hours that would relate to normal working for the factory or full capacity). (Based on CIMA definition.) MANAGED COSTS: See controllable costs. MANAGEMENT ACCOUNTING: The provision of financial information to the various levels of management within the organization for the purposes of planning, decision making, and monitoring and controlling performance. MANAGEMENT BY EXCEPTION: Control and management of costs and revenues by concentrating on those instances where significant variances occur and are highlighted by an operational control system.

MARGINAL COSTING: The approach to costing in which only the variable costs are charged to cost units. The fixed costs attributable to the relevant period are not apportioned to individual units or activities, but are met out of the total contribution generated. MARGINAL COSTS: See variable costs. MARGIN OF SAFETY: The excess (if any) of budgeted (or capacity) level of activity over the level of activity required to break even, sometimes expressed as a percentage of budgeted or capacity level of activity. For example, if break even is 8000 units and budgeted sales are 10,000 units, the budget has a 20 per cent margin of safety. MASTER BUDGETS: The overall budgets of an organization, built up from a range of individual budgets and comprising the cash budget, the forecast profit and loss account, and the forecast balance sheet. MATCHING CONCEPT/CONVENTION: See accruals concept/convention. MATERIALITY CONCEPT/CONVENTION: Acceptance that there are some transactions or events that are not significant enough for accountants to disclose, while also accepting that those that are significant enough should be disclosed separately. MATERIAL PRICE VARIANCE: See direct material price variance. MATERIAL QUANTITY VARIANCE: See direct material usage variance. MINORITY INTEREST: Shares in a subsidiary company other than those held by the parent company, plus the appropriate portion of accumulated reserves. MONEY MEASUREMENT CONCEPT/CONVENTION: The convention that financial accounting information relates only to those activities that can be expressed in money terms. N NET BOOK VALUE: The cost of an asset less its accumulated depreciation to date. Also known as the written-down cost. NET CAPITAL EMPLOYED: See capital employed. NET CASH FLOW: The net inflow or outflow of cash (i.e. total cash in less total cash out) resulting from proceeding with an investment project.

NET CURRENT ASSETS: See working capital. NET PRESENT VALUE (NPV): The value obtained by discounting by a chosen percentage all cash outflows and inflows attributable to a capital investment project. (Based on CIMA definition.) NET PROFIT: See net reported profit. NET REALIZABLE VALUE: The price at which assets are estimated to be saleable less any further costs that would be incurred in selling them. NET REPORTED PROFIT: The profit remaining after deducting all expenses from sales. Also known as net profit. NET WORKING CAPITAL: See working capital. NET WORTH: The book value of an organization as reflected by the value of shareholders' funds shown on the balance sheet. O OBJECTIVITY CONVENTION: The convention of using reliable facts relating to one way of valuing an asset rather than estimates relating to some other way, even if the latter is more realistic. OPERATING LEVERAGE: The relationship between fixed and variable costs. Also known as operational gearing. OPERATING PROFIT: The profit remaining after deducting all operating expenses (not cost of capital expenses) from sales revenue. Can also be calculated by adding back the cost of capital interest to net reported profit before tax. OPERATING STATEMENT: An internal management control document generally produced at frequent regular intervals, which reports actual costs and/ or revenues, and which usually compares these with budget and shows variances. OPERATIONAL GEARING: See operating leverage, gearing. OPPORTUNITY COST: The value of a benefit sacrificed in favour of an alternative course of action. (CIMA definition)

ORDINARY SHARES: Shares which entitle the holders to the remaining divisible profits (and, in a liquidation, the assets) after prior interests, e.g. creditors and prior charge capital, have been satisfied. (CIMA definition) OVERDRAFTS AND LOANS: An overdraft is money borrowed, nominally for a short period, the amount of which may fluctuate from day to day. Loans are finite amounts of money borrowed for finite periods; some are short-term, i.e. for less than one year, others are long-term, i.e. for more than one year. OVERHEAD ABSORPTION RATE: The basis on which indirect costs are charged to individual products or services. Common methods are direct labour cost percentage rate, direct labour rate and machine hour rate. OVERHEAD EFFICIENCY VARIANCE: The difference between the standard overhead cost for the production achieved and the standard overhead cost for the actual hours taken. (Based on CIMA definition.) OVERHEAD EXPENDITURE VARIANCE: The difference between budgeted and actual overhead expenditure. (Based on CIMA definition.) OVERHEAD(S): See indirect costs. OVERHEAD VOLUME VARIANCE: The difference between the standard overhead cost of the actual hours taken and the flexible budget allowance for the actual hours taken. (Based on CIMA definition.) P PAYBACK PERIOD: The number of years that will elapse before the cash outlays on a capital investment project are recovered. POSITION STATEMENT: Another name for the balance sheet. PREFERENCE SHARES: These are normally fixed-dividend payment shares, whose holders receive dividends in preference to ordinary shareholders but after debenture and loan stock holders. Holders may also have a prior claim to the repayment of capital in the event of liquidation. PREPAYMENTS: Expenditure on goods or services for future benefit which is to be charged to future operations, e.g. rental paid in advance. (CIMA definition) PRE-TAX PROFIT: See profit before tax. PRICE-EARNINGS RATIO: An investors' ratio calculated as:

Current stock market price of one share Most recent available earnings per share PRIME COSTS: The direct costs of production, generally comprising direct material costs, direct labour costs and other direct production expenses. PRIORITY-BASE BUDGETING: See zero-base budgeting. PRODUCTION OVERHEADS: The indirect costs of production generally comprising any labour and materials not unique to one product or service, and indirect expenses of running the plant and production premises. PROFIT: The figure representing the amount by which revenue exceeds expenses. PROFITABILITY INDEX: A statistic used in investment appraisal to supplement internal rate of return and/or net present value, calculated as: Present value of cash inflows from project Present value of cash outflows from project (i.e. the net present value of each monetary unit value, e.g. 1, $1, invested in a project). PROFIT AND LOSS ACCOUNT: A summary of an enterprise's transactions over a stated period (usually one year), which shows revenue generated, the related costs and thus the profit or loss for one period. It may also show the appropriation of profit before tax into taxation, dividends and reserves. PROFIT BEFORE TAX: The profit of the organization after all its costs have been set against its revenues, but before the appropriation of corporation tax, dividends and reserves. Sometimes referred to as net reported profit, although this term can be ambiguous; sometimes known as pre-tax profit. PROFIT VARIANCE: The difference between the standard profit on the budgeted sales volume and the actual profit for a specific period. (Based on CIMA definition.) PROFIT/VOLUME (P/V) RATIO: See contribution to sales ratio. PRUDENCE CONCEPT/CONVENTION: The convention of using the lowest of all reasonable values for an asset and of not anticipating revenue or profit. Also known as the conservatism concept/convention.

Q QUICK RATIO: A prime measure of an organization's liquidity, defined as: Liquid assets Current liabilities Also known as the acid test or the liquidity ratio. R RATE OF RETURN PRICING: A more sophisticated version of cost-plus pricing, in which the mark-up on unit cost is calculated with regard to the organization's required rate of return on capital employed. REALIZATION CONVENTION: The concept that profit is only accounted for when it is realized and not when it can be recognized. RELEVANT COSTS: Costs that will be incurred only if a course of action being considered is taken, and which are therefore relevant to making specific management decisions. See also avoidable costs. RELEVANT RANGE: The range of activity level within which fixed costs and variable costs behave in a linear fashion according to their definitions (i.e. fixed costs remain unchanged and variable costs vary in direct proportion to the activity level). RESERVES: The value of shareholders' funds in excess of the par value of their shares. Reserves can comprise: or the cumulative value of reinvested profits (also known as retentions retained earnings or retained profits) appreciation in value of fixed assets share premium.

RESPONSIBILITY ACCOUNTING: A system of accounting that segregates revenues and costs into areas of personal responsibility in order to assess the performance attained by people to whom authority has been assigned. RESPONSIBILITY CENTRE: A part of the organization for which a nominated manager has direct responsibility for performance. RETAINED EARNINGS: See reserves.

RETAINED PROFIT: Profit which has not been distributed as dividends to shareholders but has been retained within the organization. RETENTIONS: See reserves. RETURN ON CAPITAL EMPLOYED (ROCE): A ratio, usually calculated as: Profit before tax + interest paid Capital employed x 100

RETURN ON NET ASSETS (RONA): See return on capital employed. RETURN ON SALES: A ratio usually calculated as: Profit before tax Sales income x 100 or Profit before tax + interest paid Sales income x 100 REVENUE: See turnover. REVENUE CENTRE: A responsibility centre where the manager is responsible for generating revenue. REVISION VARIANCE: The difference between an original and a revised standard cost. ROLLING BUDGET: A continuously updated budget in which, as one period passes, another is added (i.e. a one-year budget would have a new month or quarter added as each month or quarter passed). It is beneficial where future costs and/or activities cannot be forecast reliably. (Based on CIMA definition.) Also known as the continuous budget. S SALES VOLUME-PROFIT VARIANCE: The difference between the normal quantity of units sold and the actual units sold, priced at the normal profit per unit. (Based on CIMA definition.)

SEGMENT MARGIN: The contribution made by an individual segment (e.g. product, product group, service, market, etc.) of an organization's activities less any direct fixed costs attributable to that segment. SEGMENT REPORTING: The use of marginal costing techniques to examine the profitability of individual segments (e.g. product, product group, service, market, etc.) of an organization's activities. SELLING PRICE VARIANCE: The difference between the actual selling price per unit and the standard selling price per unit, multiplied by the actual number of units sold. (Based on CIMA definition.) SEMI-VARIABLE COSTS: Costs that include both fixed cost and variable cost components, i.e. costs that vary as the level of activity varies but not in strict proportion. For example, a telephone bill will be larger in a quarter when more calls have been made, but will not double if the number of calls doubles, as long as any rental element remains unchanged. SET-UP COSTS: The costs involved in setting up a venture or an activity (e.g. a company, machinery, etc.) to produce a batch of goods. SHARE CAPITAL: See issued share capital. SHAREHOLDERS' FUNDS: Issued share capital plus reserves, i.e. that part of the capital in the organization that is owned by the shareholders. SHAREHOLDERS' INTEREST: See shareholders' funds. SHORT-TERM INVESTMENT: An investment which is intended to last less than one year. SHORT-TERM LOAN(S): See overdrafts and loans. SOLVENCY: A state in which an organization can pay its debts as they fall due. SOURCE AND APPLICATION OF FUNDS STATEMENT: See funds flow statement. STABILITY CONVENTION: The assumption that money does not change in value when, for example, consolidating the values of two identical assets purchased some years apart at different prices. STANDARD COSTS: Carefully predetermined costs that management establish and use as a basis fbr comparison with actual costs.

STEP COSTS: Those fixed costs that within certain limits of activity level are unchanged, but which step up or down to a new level when these limits are exceeded. STOCK(S): That portion of an organization's assets held for further production and/or sale. STOCK TURNOVER: A ratio that measures the speed at which raw materials or stocks for resale are being consumed or sold. STRAIGHT LINE DEPRECIATION: A method of depreciation which divides the depreciable base relating to a fixed asset by the number of years of anticipated useful life, the resulting figure being the annual depreciation charge over the useful life of the asset. SUNK COSTS: Those irrelevant costs that have already been incurred and thus play no part in a particular decision. SURPLUS(ES): The difference between income and expenditure in some public and voluntary sector concerns, equating to the term profit(s) in commercial concerns. T TOTAL ASSETS: The total net book value of all the assets in the organization. TOTAL LIABILITIES: The total money owed by the organization to 'outsiders' and to its shareholders. TURNOVER: The total sales income of the organization for a period, regardless of whether or not customers have yet paid. Also known as the sales revenue. U UNAVOIDABLE COSTS: Those costs which would still be incurred irrespective of the organization opting for a particular course of action. V VALUE ADDED: See added value. VARIABLE BUDGET: See flexible budget.

VARIABLE COSTING: See marginal costing. VARIABLE COSTS: Costs that vary depending on (usually) the level of activity (sales level or production level). For example, raw material costs would generally double if production or sales doubled and thus would be regarded as variable. Also known as marginal costs. VARIANCE: The difference between planned, budgeted or standard cost and actual cost (and similarly in respect of revenues). (CIMA definition.) Variances are generally referred to as favourable or adverse, depending on whether they increase or decrease profit. VARIANCE ANALYSIS: The analysis of variances arising in a standard costing system into their constituent pans. (Based on CIMA definition.) W WORKING CAPITAL: The capital available for conducting the day-to-day operations of the organization. Usually defined as current assets less current liabilities. (Based on C1MA definition.) Also known as net working capital and net current assets. WORKING-CAPITAL CYCLE: The cycle associated with the flow of cash through the purchase of stocks, receipt of money owed and payments of money owing. WRITTEN-DOWN COST: See net book value. Z ZERO-BASE BUDGETING: A method of budgeting whereby all activities are re-evaluated each time a budget is set. Discrete levels of each activity are valued and a combination chosen to match funds available. (CIMA definition) Sometimes called priority-base budgeting.