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Accounting (Fach) / Accounting Definitions (Lektion)

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• Creditor Days Payables Days.
• Debtor Days Receivable Days.
• Unsecured: Loans for which no assets of an entity have been pledged in the event that the entity fails to repay the loan.
• Costing The process of determining the cost of products or services.
• Direct Cost The costs of a product or service that vary exactly in line with each product or service produced. Direct costs reflect the additional costs incurred by a business in producing one more unit of a product or service. Also known as the variable or marginal cost of a product or service.
• Variable Costs The costs of a product or service that vary directly in line with the production of a product or delivery of a service. Also known as the direct cost or marginal cost.
• Marginal Cost: The additional cost incurred in producing one more unit of product or delivering one more unit of service. Also known as the direct cost or variable cost.
• Indirect Costs Also known as fixed costs. Costs that do not vary in line with production or sales over a given period of time.
• Fixed Costs Costs that do not vary in line with production or sales over a given period of time. Also known as indirect costs.
• Normal Level of Production The expected level of production achievable within an accounting period. This level is used as the basis for allocating fixed overhead costs to products and in the valuation of inventory at the year end.
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• Absorption Costing The cost of products includes all the direct costs of production and a proportion of the indirect costs of production based on normal levels of output.
• Prime Cost The total variable cost of producing one product or service.
• Production Cost The total variable costs of producing one product or service plus the proportion of fixed production overheads allocated to products and services on the basis of normal level of production.
• Period Costs Fixed costs incurred in the administration, marketing and financing of an entity relating to the period in which they are incurred.
• Cost Allocation The process of allocating costs, both direct and indirect, to products or services.
• Activity Based Costing Overhead costs are allocated to products on the basis of activities consumed: the more activities that are associated with a particular product, the more overhead is allocated to that product and so the higher its cost and selling price will be.
• Cost Centre A division of an entity to which attributable costs are allocated.
• Contribution: Selling price less the variable costs of making that sale.
• Limiting Factor A scarcity of input resources, such as materials or labor, is referred to as a limiting factor in the production of goods or services. When input resources are scarce, entities calculate the contribution per unit of limiting factor to maximize their profits in the short term.
• Sunk Costs Past costs that have been incurred and thus are irrelevant to future decisions.
• Break Even Point The point at which an entity makes neither a profit nor a loss since sales revenue covers both variable costs of units sold and fixed costs.
• Margin of Safety Shows how far sales could fall (in units) before a loss is made. The higher the margin of safety, the less an organization is exposed to the risk of a fall in sales which could result in the organization facing a loss-making situation.
• Capital Investment Appraisal An evaluation of the long-term cash generating capacity of capital investment projects to assist decision makers in allocating scarce investment capital resources to projects to maximize long run profits.
• Payback The number of years it will take for the cash inflows from a capital investment project to pay back the original cost of the investment.
• Accounting Rate of Return (ARR): An investment appraisal technique which averages the projections of accounting profit to calculate the expected rate of return on the average capital invested.
• Net Present Value (NPV): The total of the discounted future cash inflows and outflows from a project. Projects with a positive net present value are accepted, while projects with a negative net present value are rejected.
• Internal Rate of Return (IRR): The discount rate applied to the cash flows of a capital investment project at which the net present value of the project is zero pounds.
• Time Value of Money Money received today is worth more than money received tomorrow due to the impact of inflation and the uncertainty surrounding the receipt of money in future time periods.
• Present Value The discounting of future cash inflows and outflows to express all cash flows in the common currency of today, thereby facilitating a fair comparison of projected cash inflows and outflows for evaluating different capital investment proposals.
• Discounting Future cash inflows and outflows are discounted to their present value using an entity’s cost of capital.
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• Cost of Capital: The level of return on an investment that is acceptable to a business given the level of risk involved. Sometimes known as the hurdle rate of return.
• Budget A financial plan for a future period which is prepared in advance based on agreed objectives and strategy. So the Master Budget is prepared within the context of the overall Strategic Corporate Plan. It implies intention to achieve and relevant forecasts may be taken into account when preparing budgets.
• Fixed Budget : Based on a predetermined level of activity.
• Flexible Budget Designed to change with different levels of activity.
• Incremental Budget Take last time and change by e.g. %.
• Zero-Based Each element of the budget is reduced to zero – any increase to the budget must be justified.
• Cost Centre: A department/ section to which only costs can be allocated.
• Profit Centre One which attracts both costs and revenues and can therefore deliver profit (or loss).
• Variance: When monitoring actual performance against budget at various levels of detail, the difference is expressed as a variance. It will either be zero (nil), adverse or favourable
• Procter’s “Budget Games Refers to certain behaviours exhibited by budget-responsible managers. The object of these “games” is to create some form of benefit for the employee even if the company suffers as a result.
• Standard Costing The costs and selling prices of products are estimated with a reasonable degree of accuracy. Comparisons of actual and standard outcomes are then undertaken to determine the variances between expected and actual outcomes with a view to revising standards where necessary.
• Variances The difference between a planned, budgeted or standard cost and the actual cost incurred.
• Standard Cost The planned unit cost of the products, components, or services produced in a period.
• Direct Materials Variance (SQ x SP) – (AQ x AP)
• Direct Materials Price Variance (SP – AP) x AQ
• Direct Materials Usage Variance (SQ – AQ) x SP
• Direct Labour Variance (SH x SR) – (AH x AR)
• Direct Labour Rate Variance (SR – AR) x AH
• Direct Labour Efficiency Variance (SH – AH) x SR
• Variable Overhead Rate Variance AH (SR – AR)

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