Absorption costing

A method of costing that, in addition to direct costs, assigns a proportion or all the production overheads to the cost units. Costs are first allocated or apportioned to the cost centres, where they are absorbed into the cost unit using one or more overhead absorption rates.

Absorption rate

A means of attributing overheads to a product or service.

Accounting

T he process of identifying, measuring, recording and communicating economic transactions.

Accounting equation

Assets = Capital + Liabilities

Accounting rate of return (ARR)

Measures the predicted average profit before interest and tax as a percentage of the average capital employed in a proposed investment project.

Accounting standard

An authoritative statement of how a particular type of transaction or other event should be reflected in the financial statements. Compliance with accounting standards is normally necessary for the financial statements to give a true and fair view.

Accumulated depreciation

The total depreciation charged to date.

Accrual

An estimate of a liability that is not supported by an invoice or a request for payment at the time when the accounts are prepared.

Accruals concept

The principle that revenue and costs are recognised as they are earned and incurred and they are matched with one another and dealt with in the profit and loss account of the period to which they relate, irrespective of when cash (or its equivalent) is received or paid.

Activity-based costing (ABC)

A method of costing in which overheads are assigned to activities and cost drivers are used to attach the activity cost pools to the cost units.

Activity cost pool

A collection of all the elements of cost associated with an activity.

Appropriation account

A record of how the net profit/(r loss) for the period has been has been distributed.

Asset

A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise (IASB, 1989, para. 25)

Bad debts

An amount owed by debtors that is considered to be irrecoverable. It is written off as a charge against profit or against an existing provision for doubtful debts.

Batch costing

A method of costing for specific orders in which costs are attributed to a group of similar items that maintains its identity throughout one or more stages of production.

Breakeven point (BEP)

The level of activity at which there is neither a profit nor a loss, as measured by volume of production or sales, percentage of production capacity or level of sales revenue.

B udget

A quantitative or financial statement that contains the detailed plans and policies to be pursued during a future accounting period.

B udget centre

A designated part of an entity for which budgets are prepared and controlled by a manager.

Budgetary control

The process by which financial control is exercised by managers preparing budgets for revenue and expenditure for each function of the organisation in advance of an accounting period. It also involves the continuous comparison of actual performance against the budget to ensure the plan is achieved or to provide a basis for its revision.

Capital

The money invested in the entity by the owner(s) to enable it to function.

Capital employed

Fixed assets plus net current assets less creditors: amounts due after more than one year.

Capital investment appraisal

The evaluation of proposed investment projects, with a view to determining which is likely to give the highest financial return.

Cash deficit

The net cash position where cash outflows exceed cash inflows.

Cash inflows

Cash transactions that bring money into the business.

Cash outflows

Cash outflows are cash transactions that take money out of the business.

Cash surplus

The net cash position where cash inflows exceed cash outflows.

Conceptual framework

A statement of theoretical principles that provides guidance for financial accounting and reporting.

Consolidation

The process of adjusting and combining financial information from the individual financial statements of a parent undertaking and its subsidiary undertakings to prepare consolidated financial statements that present financial information for the group as a single economic entity.

Continuous operation costing

Methods of cost accounting used where products or services are produced as a constant operation.

Continuous weighted average (CWA)

A method of costing for direct materials based on the weighted-average price at which materials are received, which is recalculated every time a new consignment is received.

Contract costing

A method of costing for specific orders in which costs are attributed to individual long-term contracts.

Contribution

Contribution is the sales value less the variable costs and is based on the assumption that the sales value and the variable costs will be constant.

Cost

Cost is the amount of expenditure incurred on goods and services required to carry out the economic activities of the entity.

Cost accounting

The process of collecting, processing and presenting financial and quantitative data within an entity to ascertain the cost of cost centres and cost units.

Cost centre

A cost centre is a designated location, function, activity or item of equipment for which costs are collected.

Cost driver

Any factor that causes a change in the cost of an activity. An activity may have multiple cost drivers associated with it.

Cost unit

A unit of production for which costs are collected.

Creditor

A person or entity to whom money is owed as a consequence of the receipt of goods or services.

Cumulative cash brought forward (b/f)

The cash surplus or deficit at the start of the month that has been brought forward from the previous month.

Cumulative cash carried forward (c/f)

The cash surplus or deficit at the end of the month that is carried forward to the next month.

Current assets

Cash or other assets held for conversion into cash in the normal course of trading.

Debtor

A person or entity owing money.

Depreciation

The systematic allocation of the cost (or revalued amount) of a tangible fixed asset, less any residual value, over its useful economic life.

Direct costs

Expenditure that can be directly traced to a cost unit.

Discounted cash flow (DCF)

A method that predicts the stream of cash inflows and outflows over the estimated life of a project and discounts them to present values.

Discounted payback period

The time required for the predicted discounted net cash flows to equal the capital invested in a proposed investment project.

Double-entry bookkeeping

Double-entry bookkeeping is based on the principle that every financial transaction involves the simultaneous receiving and giving of value, and is therefore recorded twice.

Equity

The residual interest in the assets of the enterprise after deducting all its liabilities (IASB, 1989, para. 25).

Expenses

Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or occurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants (IASB, 1989, para. 70).

First in, first out (FIFO)

A method of costing for direct materials based on the price of the earliest consignment received for all issues to production until the quantity received at that price has been issued; then the price of the next consignment.

Finance

1. The practice of manipulating and managing money.

2. The capital involved in a project, especially the capital needed to start a new business.

3. A loan of money for a particular purpose, especially by a financial institution, such as a bank.

Financial accounting

A branch of accounting concerned with classifying, measuring, and recording the economic transactions of an entity in accordance with established principles, legal requirements and accounting standards. It is p rimarily concerned with communicating a true and fair view of the financial performance and financial position of an entity to external parties.

Fixed assets

Assets the business owns and plans to keep in the long term

Fixed budget

A budget that is not changed merely because the actual activity level differs from the planned level of activity.

Fixed cost

An item of revenue expenditure that is unaffected by changes in the level of production or sales activity in the short term.

Flexible budget

A budget that changes in accordance with activity levels and reflects the different behaviours of fixed and variable costs.

Generally Accepted Accounting Principles (GAAP)

In the UK, these are the accounting standards, the requirements of company legislation and stock exchange rules.

Goodwill

The difference between the value of the separable net assets of an entity and the total value.

Gross profit

The difference between the sales revenue and the cost of goods sold.

Income

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants (IASB, 1989, para. 70).

Indirect costs

Revenue expenditure that cannot be traced directly to a cost unit and is therefore an overhead cost.

Intangible fixed assets

F ixed assets do not have a physical form.

Internal rate of return (IRR)

The interest rate at which the sum of the discounted values of the predicted net cash flows is equal to capital invested in a proposed investment project.

Job costing

A method of costing for specific orders in which costs are attributed to individual jobs.

Liability

A present obligation of the enterprise resulting from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits (IASB, 1989, para. 25).

Limiting factor

A limiting factor is any constraint that limits the business from achieving higher levels of performance and profitability.

Management accounting

A branch of accounting concerned with concerned with collecting, analysing, interpreting quantitative and financial information. It is primarily concerned with communicating information to management for planning, controlling and decision making.

Marginal cost

The variable cost per unit of production.

Materials

The supplies of raw materials, components or sub-assemblies used to make a product.

Net book value (NBV)

Cost of a fixed asset less the accumulated depreciation.

Net current assets

The difference between current assets and creditors: amounts due within one year.

Net present value (NPV)

The difference between the sum of the predicted discounted cash inflows and outflows for a proposed investment project.

Net profit

The amount of income earned after deducting all expenses.

Net realisable value (NRV)

The sales value of the stock minus the additional costs likely to be incurred in getting the stocks into the hands of the customer.

Opportunity cost of capital

The interest forgone because the cash was not available for investment today.

Output costing

A method of cost accounting used where only one product is manufactured.

Payback period

The time required for the predicted net cash flows to equal the capital invested in a proposed investment project.

Prepayment

Revenue expenditure made in advance of the accounting period in which the goods or services will be received.

Process costing

A method of cost accounting used where the production process is carried out as a sequence of operations.

Provision for depreciation

An amount charged against profit and deducted from the net book value of the asset.

Provision for doubtful debts

An amount charged against profit and deducted from debtors to allow for the estimated non-recovery of a proportion of debts.

Ratio analysis

Ratio analysis is a technique for evaluating the financial performance and stability of an entity, with a view to making comparisons with previous periods, other entities and industry averages over a period of time.

Relevant range

The activity levels within which assumptions about cost behaviour in breakeven analysis remain valid.

Service costing

A method of cost accounting used where specific services or functions are provided.

Standard costing

A method of control in which standard costs and revenues are compared with actual performance to identify variances, which can be used to improve performance.

Tangible fixed assets

Fixed assets that are non-monetary in nature and have a physical form.

Time value of money

The concept that cash received today is worth more than the same amount received at a later date because of the opportunity cost of capital.

Total net assets

Fixed assets plus net current assets less creditors: amounts due after more than one year.

Trial balance

A list of the balances of all the accounts in a double-entry bookkeeping system, with debit balances in the left-hand column and credit balances in the right-hand column. If the recording processes have been accurate, the totals of each column should be the same.

Variable cost

An item of revenue expenditure that varies directly with changes in the level of production or sales activity.

Variance

The difference between the predetermined cost and the actual cost, or the difference between the predetermined revenue and the actual revenue.

Working capital

Current assets less creditors: amounts due within one year.