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Cheat Sheet

Managerial Accounting For Dummies

From Managerial Accounting For Dummies by Mark P. Holtzman

Managerial accounting helps managers and other decision-makers understand how much their products cost, how their companies make money, and how to plan for profits and growth. To use this information, company decision-makers must understand managerial-accounting terms. When planning for the future, they follow a master budgeting process. To prepare this budget, and to understand how costs behave, the decision-makers should understand cost-volume-profit relationships, which explain how changes in volume or price affect profits.

Key Costs Related to Managerial Accounting

In accounting, a cost measures how much you pay/sacrifice for something. Managerial accounting must give managers accurate cost information relevant to their management decisions. Here are several cost-related terms you encounter in managerial accounting:

  • Direct cost: Cost that you can trace to a specific product

  • Indirect cost: Cost that you can't easily trace to a specific product

  • Materials: Physical things you need to make products

  • Labor: Work needed to make products

  • Overhead: Indirect materials, indirect labor, and other miscellaneous costs needed to make products

  • Variable costs: Costs that change in direct proportion with activity level

  • Fixed costs: Costs that don't change with activity level

  • Mixed costs: Combination of fixed and variable costs

  • Contribution margin: Sales less variable costs

  • Product costs: Costs needed to make goods; considered part of inventory until sold

  • Period costs: Costs not needed to make goods; recorded as expenses when incurred

  • Work-in-process cost: How much you paid for goods that are started but not yet completed

  • Finished goods cost: How much you paid for goods completed but not yet sold

  • Cost of goods manufactured: The cost of the goods completed during a period

  • Cost of goods sold: The cost of making goods that you sold

  • Controllable costs: Costs that you can change

  • Noncontrollable costs: Costs that you can't change

  • Conversion costs: Direct labor and overhead

  • Incremental costs: Costs that change depending on which alternative you choose; also known as relevant costs and marginal costs

  • Irrelevant costs: Costs that don't change depending on which alternative you choose

  • Opportunity costs: Costs of income lost because you chose a different alternative

  • Sunk costs: Costs you've already paid or committed to paying

  • Historical cost: How much you originally paid for something

  • Cost per unit: Cost of a single unit of product

  • Expense: Costs deducted from revenues on the income statement

  • Cost driver: Factor thought to affect costs

  • Process cost: Cost of similar goods made in large quantities on an assembly line

  • Job order cost: Cost of a batch of specially made goods

  • Absorption cost: Cost that includes fixed and variable product costs

  • Target cost: Cost goal set for engineers designing a product

Budgets that Go into Creating a Master Budget

A master budget is a plan created to manage a company's manufacturing and sales activity to meet profit and cash flow goals. Creating a master budget requires careful coordination of several smaller budgets covering all parts of the organization; that way, the master budget is realistic but not complacent.

The master budget contains the following elements:

  • Sales budget

  • Production budget

  • Direct materials budget

  • Direct labor budget

  • Manufacturing overhead budget

  • Selling and administrative budget

  • Capital acquisitions budget

  • Cash budget

  • Budgeted financial statements

Cost-Volume-Profit Relationships for Managerial Accounting

Managerial accounting provides useful tools, such as cost-volume-profit relationships, to aid decision-making. Cost-volume-profit analysis helps you understand different ways to meet your company’s net income goals. This image describes the relationship among sales, fixed costs, variable costs, and net income:

image0.jpg

  • The bottom axis indicates the level of production — the number of units you make.

  • The left axis indicates value in dollars.

  • Where total sales equals total costs, the company breaks even (which is why that’s called the break-even point).

  • The shaded area to the upper right of this break-even point is profit.

  • The shaded region to the lower left is net loss.

  • Total variable costs are a diagonal line because the higher the production, the greater the variable costs.

  • The total fixed costs line is horizontal because regardless of the production level, fixed costs stay the same.

  • Total costs equal the sum of total variable costs and total fixed costs.

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