Glossary

An activity driver is an activity that causes the incurrence of the variable cost.  Common activity drivers are units of sales, units of production, direct labor hours worked, or machine hours used.

Activity variances are the difference between the planning budget and the flexible budget.  Activity variances are solely the result of changing the activity level from the planning quantity used for the planning budget to the actual quantity used for the flexible budget.

An allocation base or cost driver is a production activity that drives costs such as direct labor hours, machine hours, direct labor dollars, or direct material dollars.

Assets are items that an organization owns that have future value to the organization.

Break even is the point at which net operating income equals zero. An organization breaks even when its sales revenue covers total costs--both variable and fixed.

Breakeven is the point at which net operating income equals zero, when sales revenue covers total costs--both variable and fixed.

A detailed financial plan for future time periods.

The budgeted income statement reports the organization's profitability during a specific period.

Common fixed costs are costs that are common to, or shared by, all organizational segments.

Contribution margin is calculated as Sales less Variable Expenses. It represents the margin an organization can make or lose as the number of units sold increases or decreases.

An income statement reports an organization’s sales revenue less its expenses (costs) for specified period of time. On a contribution margin income statement, costs are classified as variable or fixed.

The contribution margin ratio is calculated as Contribution Margin divided by Sales. It represents the percentage of margin you can make or lose as the number of units sold increases or decreases.

Cost behavior is how a cost reacts to changes in production, usage, or sales quantity. Cost behavior is classified as variable, fixed, or mixed.

Cost classification is the process of separating costs into different categories.

A cost formula is used to predict the expected cost for a specific expenditure.

Cost of Goods Sold is the expense account used to report the costs associated with purchasing or manufacturing the inventory sold.

Cost structure is the type and proportion of fixed and variable costs in relation to the organization's total costs.

Cost volume profit (CVP) analysis is a tool used to estimate how profits are affected by the following five factors: 1.) selling prices, 2.) sales volume, 3.) unit variable costs, 4) total fixed costs, or 5.) mix of products sold.

Direct labor is manufacturing labor costs that can be easily and economically traced to the production of the product.

Direct materials are raw materials costs that can be easily and economically traced to the production of the product.

The direct materials purchases budget estimates the amount of raw materials purchases needed to produce the units scheduled for production plus the desired level of raw materials ending inventory.

An expense is a cost of operations that a company incurs to generate revenue. Generally, the benefit of the cost is used in the same period in which the corresponding revenue is reported.

Financial accounting is concerned with classifying, recording, and reporting financial transactions in a formal accounting system

The Finished Goods inventory account is where finished inventory is reported at the cost to produce—direct material, direct labor, and manufacturing overhead—until it is sold.

Fixed cost is the same cost in total regardless of the quantity produced, used, or sold but the per-unit cost changes depending on the quantity produced, used, or sold.

A flexible budget is the planning budget reforecasted using the actual level of activity instead of the planned level of activity.  The flexible budget uses the same cost formulas as the planning budget but is prepared using the actual sales quantity as the cost driver. 

Flexible budget variances are the discrepancies found when comparing the planning budget, flexible budget, and actual operating results.

Gross profit is sales revenue less the cost of the goods sold.

The high-low method is used to estimate the variable and fixed components of a mixed cost. The difference between the highest use observation and the lowest use observation is considered the variable portion of the cost.

An income statement also referred to as a profit and loss statement, reports an organization’s revenue and expenses for a specified period of time. 

Indirect labor costs are manufacturing labor costs that cannot be easily and economically traced to the production of the product, e.g. the production supervisor’s salary or quality control.

Indirect materials are raw materials that cannot be easily and economically traced to the production of the product, e.g. glue, nails, sandpaper, towels, etc.

A standard job cost sheet records all direct material, direct labor, and manufacturing overhead costs applied to a job. 

Job-order costing is an accounting system used to assign costs to the products or services that an organization produces. 

A liability is a present obligation for an organization to provide cash or some other service in the future. Examples of common liability accounts include, Accounts Payable, Salaries Payable, or Taxes Payable.

Managerial accounting is concerned with classifying, analyzing, and reporting data for internal decision making.

A manufacturing business is a business entity that uses raw materials, parts, or other components to make a finished good.

Manufacturing overhead are all other indirect costs associated with manufacturing the product that are not direct material or direct labor. 

The Manufacturing Overhead inventory account is used to record actual manufacturing overhead costs incurred to produce a product.

The manufacturing overhead budget calculates the total manufacturing overhead that will be incurred to satisfy production.

A master budget consists of a set of interrelated but independent budgets that articulate the organization’s sales, production, profit, and financial position for a specified time period.

A merchandising business is a business entity that purchases finished inventory products from the business that manufactures the inventory with the intent to resale it and make a profit.  A merchandiser makes a profit by marking up the inventory and selling it at a higher price to its customers

Mixed cost is a cost that has both a variable and a fixed component.

When multiple predetermined manufacturing overhead rates are used, manufacturing overhead costs are allocated to specific departments or processes and then applied to jobs using an allocation base or cost driver that drives the overhead costs for that department or process.

The formula to compute net operating income, sometimes referred to as net income or net profit, is the organization's revenues less its expenses.

An organization-wide predetermined manufacturing overhead rate is computed by dividing the total estimated manufacturing overhead amount by the total estimated allocation base or cost driver.

An organizational segment is a part or activity within an organization about which managers would like cost, revenue, or profit data. Organizational segments can include divisions, individual stores, geographic regions, customers, or product lines.

Performance evaluation occurs at the end of the budget cycle and is the process of comparing the budgeted estimates to the actual results.

Period costs are all other costs not associated with purchasing or producing inventory for resale but are necessary for sustaining the organization, selling the inventory, and servicing customers.

A planning budget is a detailed financial plan for future time periods.

Estimated overhead rate used to uniformly apply estimated manufacturing overhead to the jobs in process during a specified period of time using some type of allocation base or cost driver, such as direct labor hours, direct material dollars, or machine hours.

Product costs are all costs associated with purchasing or producing inventory for resale.

The production budget estimates the number of units that need to be produced to 1) meet sales demand and 2) maintain the desired level of finished goods inventory on hand.

The Raw Materials inventory account is used to record the costs for all raw materials—direct and indirect—purchased to manufacture a product.

The relevant range of production is the range between a minimum and a maximum production activity where certain revenue and expense levels can be expected to occur.

Revenue and spending variances are the difference between the flexible budget and the actual financial results.  Revenue and spending variances are used to evaluate how well the organization did at achieving revenue, cost, and profit targets.

A revenue formula is used to predict expected revenue for a given level of sales activity.

The sales budget details the estimated sales quantity, sales price per unit, and total sales revenue.

Sales revenue is the income received by a company from its sales of goods or the provision of services.

A scatter plot shows if a linear relationship exists between two sets of data.

The segment margin is calculated as the sales revenue traceable to an organizational segment less the variable costs traceable to an organizational segment.

Segmented income reporting traces sales revenue, variable costs, and fixed costs to the organizational segments responsible for generating the sales revenue or costs. 

Segmented income statements allocate revenue and cost to the identified segments within an organization and report the profitability of each segment.

Budget used to project selling and administrative expenses (S&A expenses) or period expenses.

Standard costs are cost targets used to make financial projections and evaluate performance.

Standards are cost or revenue targets used to make financial projections and evaluate performance.

Target profit is the point at which net operating income equals a specified amount. Target profit is calculated when an organization needs to know the quantity of sales required to cover total costs and earn a certain net profit.

Traceable fixed costs are costs that can be traced directly to an organizational segment. 

An income statement reports an organization’s sales revenue less its expenses (costs) for specified period of time. On a traditional income statement, costs are classified as product or period.

Variable costs are the same cost per unit but the total cost depends on the quantity produced, used, or sold.

A variance is any discrepancy found when two or more items are compared.

Work in Process (WIP) is the inventory account where product costs including direct material, direct labor, and manufacturing overhead are accumulated while the jobs are in the manufacturing process.