1.
Value Chain
"All steps from idea to customer"
→ Every activity involved in making, marketing, and delivering a product or service.
2. Activity-Based Costing (ABC)
"Cost by activity use"
→ Assigns overhead based on how much of each activity a product actually uses.
3. Total Quality Management (TQM)
"Zero defects goal"
→ A system focused on continuous quality improvement and eliminating errors in every
stage of production.
4. Balanced Scorecard
"Big picture performance tool"
→ A performance evaluation method using financial and non-financial measures tied to
company objectives.
5. Just-in-Time Inventory (JIT)
"Only what you need, when you need it"
→ Inventory system where goods are purchased or made just before they are needed,
reducing waste and storage.
6. Corporate Social Responsibility (CSR)
"Do good while doing business"
→ A company's commitment to ethical practices, environmental care, and social
well-being.
7. Statement of Ethical Professional Practice
"IMA’s ethics code for accountants"
→ A code by the Institute of Management Accountants promoting honesty, fairness,
integrity, and responsibility in management accounting.
a. Variable cost: Direct materials cost (e.g., fabric per yard)
b. Fixed cost: Rent expense for factory space
c. Mixed cost: Utility bills (a fixed basic fee plus a variable usage charge)
d. Period cost: Advertising expense
e. Product cost: Direct labor cost (cost incurred in assembling a product)
Possible Other Cost Concepts:
1. Sunk Cost: Example – The cost of equipment that has already been purchased and cannot
be recovered.
2. Opportunity Cost: Example – The profit lost by choosing one option over another. For
instance, if you use factory space to produce product A, the opportunity cost is the profit you’d
have earned by using that space to produce product B.
3. Relevant (Incremental) Cost: Example – The additional cost incurred for accepting a special
order.
4. Controllable Cost: Example – Discretionary spending such as travel or office supplies that a
department manager can control.
5. Uncontrollable Cost: Example – Company-wide administrative expenses that cannot be
influenced by a lower-level manager.
6. Direct Cost: Example – Raw materials directly traceable to a product.
7. Indirect Cost: Example – Factory overhead expenses like maintenance that cannot be directly
traced to a specific product.
1. Going Concern: Assume the business will continue operating indefinitely.
2. Materiality: Only report items that are significant enough to influence decisions.
3. Full Disclosure: Provide all relevant information in the financial statements.
4. Periodicity: Divide the business’s life into regular time periods (e.g., monthly, quarterly,
yearly).
5. Relevance: Information is useful if it can affect decision-making.
6. Historical Cost: Record assets at the amount paid for them.
7. Consistency: Use the same accounting methods from one period to the next.
8. Economic Entity: Keep the business’s financial records separate from the owners’ personal
records.
9. Faithful Representation: Ensure financial reports are complete, neutral, and free from error.
10. Monetary Unit: Only record transactions that can be measured in a stable currency.
Additional Timing Concepts:
11. Accrual-Basis Accounting: Record revenues and expenses when they occur, not when cash
is exchanged.
12. Calendar Year: An accounting period that runs from January 1 to December 31.
13. Expense Recognition Principle: Match expenses with the revenues they generate in the
same period.
Chapter 13: Cost-Volume-Profit (CVP) Analysis
Contribution Margin (CM):
Contribution Margin per Unit = Selling Price − Variable Cost
Contribution Margin Ratio = Contribution Margin ÷ Selling Price
Break-even Point:
Break-even in Units = Total Fixed Costs ÷ Contribution Margin per Unit
Break-even in Sales Dollars = Total Fixed Costs ÷ Contribution Margin Ratio
Target Net Income (Profit):
Required Sales in Units = (Fixed Costs + Target Net Income) ÷ Contribution Margin per Unit
Required Sales in Dollars = (Fixed Costs + Target Net Income) ÷ Contribution Margin Ratio
Mixed Cost Analysis – High-Low Method:
Variable Cost per Unit = (High Activity − Low Activity) ÷ (High Units − Low Units)
Fixed Cost = Total Cost − (Variable Cost × Activity Level)
📘 Chapter 14: Incremental Analysis
Special Order Profit/Loss:
Profit or Loss = (Selling Price − Variable Cost) × Number of Units − Additional Fixed Costs
📘 Chapter 15: Budgetary Planning
Sales Budget:
Sales Revenue = Expected Units to Sell×Selling Price per Unit
Production Budget:
Required Production Units = Expected Sales Units + Desired Ending Inventory − Beginning
Inventory
Direct Materials Budget:
Materials Required = Units to Produce × Materials per Unit
Materials to be Purchased = Materials Required + Desired Ending Inventory − Beginning
Inventory
Total Cost of Materials Purchased = Materials to Purchase × Cost per Unit of Material
📘 Chapter 16: Budgetary Control
Flexible Budget Formula:
Total Budgeted Costs = Fixed Costs + (Variable Cost per Unit × Actual Activity Level)
📘 Appendix F: Activity-Based Costing (ABC)
Traditional Costing – Steps and Formula
1. Calculate Plant-wide Overhead Rate:
Overhead Rate = Total Overhead ÷ Total Activity Base (e.g., machine hours or labor
hours)
2. Apply Overhead to Products:
Overhead Applied = Overhead Rate × Product's Activity Usage
Activity based costing: Activity Rate = Estimated Overhead for Activity ÷ Estimated Use of
Cost Driver. Rr&
4. Assign overhead to products:
Overhead Applied = Product’s Use of Driver × Activity Rate
(Total Overhead per Product = Sum of all activities applied)
📘 Appendix H: Pricing
Target Costing:
Target Cost = Target Selling Price − Desired Profit
Cost-Plus Pricing:
Selling Price = Total Cost + (Markup Percentage × Total Cost)
OR
Desired Return per Unit = (Desired ROI × Total Investment) ÷ Number of Units
Selling Price = Total Cost per Unit + Desired Return per Unit