MBA Supplementary Resources Finance Glossary

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GLOSSARY OF ACCOUNTING TERMS

Adapted from the Glossary prepared for the B655 Course Team by Peter Clarke, Euan Henderson, Glenna White, Alan Parkinson and RichardWheatcroft.

This version was prepared for B800 by Richard Wheatcroft.

This Glossary brings together some of the more important and relevanttechnical accountancy terms introduced in the course.

Terms picked out in bold within definitions are themselves defined elsewherein the Glossary.

Some of the terms in this Glossary do not appear in the course materials butare included for wider reference purposes.

Acknowledgements

The Open University is indebted to the Chartered Institute of Management Accountants (CIMA) and the International Stock Exchange of the UnitedKingdom and the Republic of Ireland Limited for permission to reproducedefinitions from their official terminology.

A

ABSORPTION COSTING: The procedure that charges fixed as well asvariable overheads to cost units. (CIMA definition) The term may be appliedwhere production costs only, or all functions, are so allotted. See overheads,fixed costs and variable costs.

ACCOUNT: A structured record of monetary transactions, kept as part of anaccounting system. It may be kept in a ledger or on a computer file andrelates assets, liabilities, revenues and/or expenses.

ACCOUNTING RATE OF RETURN: Ratio sometimes used in investmentappraisal, based on profits as opposed to cash flows. Not a recommendedmeasure. (Based on CIMA definition.)

ACCRUAI.S CONCEPT/CONVENTION: The concept that revenues andcosts are matched one with the other and dealt with in the profit and lossaccount of the period to which they relate, irrespective of the period of

receipt or payment. (CIMA definition) To accrue an amount is to enter it in the



accounts in accordance with the accruals concept. Also known as thematching concept/convention.

ACCRUED EXPENSES: Costs relating to a period which have not yet beentaken into account because They have not yet been invoiced by the supplier

or paid. These will include such items its electricity and telephone calls,which are generally invoiced in arrears.

ACID TEST: See quick ratio and liquidity ratio.

ACTIVITY-BASED COSTING (ABC): Cost attribution to cost units on thebasis of benefit received from indirect activities. (C1MA definition)

ADDED VALUE: The increase in realizable value resulting from an alteration

in form, location or availability of a product or service, excluding the cost of purchased materials and services. Note: Unlike conversion cost, addedvalue includes profit. Also known as value added.

APPORTIONING: See cost apportionment.

APPORTIONMENT: See cost apportionment.

ASSET TURNOVER: See asset utilization ratio.

ASSET UTILIZATION RATIO (AUR): A ratio indicating the turnover generated by each E1 of assets, or the number of times assets are turnedover in the year. Sometimes called asset turnover .

ASSETS: Resources of value owned by an organization. See also fixedassets and current assets.

ATTRIBUTION: See cost attribution.

AVERAGE COST (AVCO): A method of pricing the issue of material usingthe average purchase price of the units in stock.

AVOIDABLE COSTS: The specific costs of an activity or a sector of anorganization that would be avoided if that activity or sector did not exist. Seealso relevant costs.

B

BAD DEBT: A debt that it is known, assumed or expected will not be settled.It is normally written off as a charge to the profit and loss account.



BALANCE SHEET: A statement of the financial position of an organization ata given date, disclosing the value of the assets, liabilities and accumulatedfunds such as shareholders' contributions and reserves, which is prepared togive a true and fair view of the state of the organization at that date. (Based on CIMA definition.)

BREAK EVEN: The level of activity (e.g. level of sales in a period) at whichthe organization makes neither a profit nor a loss, as its total costs exactlyequal its total income.

BREAK-EVEN ANALYSIS: The analysis of points at which sales equal totalcost for various levels of output, prices, etc.

BREAK-EVEN CHART: A chart indicating profit or loss arising at different

levels of sales volumes within a limited range.

BREAK-EVEN POINT: See break even.

BUDGETING: The preparation of financial plans, based on the organization'sobjectives, for a future period (usually a year). The constituent budgets mayrelate to costs, revenues, working capital movements, capital expenditureand cash flow(s).

C

CAPITAL ALLOWANCES: Deductions from profit allowed by the InlandRevenue for the cost of recent capital expenditure on fixed assets; thesereplace an organization's depreciation charge in calculating taxable profit. CAPITAL AND RESERVES: As a composite term, the investments made byshareholders comprising direct capital investment and retained profits,belonging to shareholders, not distributed but invested on their behalf bymanagement.

CAPITAL EMPLOYED: The funds used by an organization for its operations.(CIMA definition) Net capital employed is often used to describe the long-term and semi-permanent funds in the organization (i.e. issued sharecapital, reserves and long-term loans, but excluding current liabilities).

CAPITAL EXPENDITURE: Expenditure on fixed assets (in contrast withrevenue expenditure) intended to benefit future accounting periods or expenditure that increases the capacity, efficiency, life span or economy of

an existing fixed asset. (Based on CIMA definition.)

CASH BUDGET: A budget showing the pattern, from period to period, of:



· cash flow into the organization (receipts)

· cash flow out from the organization (payments)

· the resultant effect on bank balances or overdrafts.

CASH FLOW: The difference between cash generated and cash spent in aperiod. Cash flows differ from profit flows not least because of theapplication of the accruals or matching concept/convention.

CASH FLOW STATEMENT: A statement listing the inflows and outflows of cash. It normally details such flows for day-to-day items and capital itemswithin a particular period. It may be a projection (cash flow forecast) or

historical.

COMMITTED COSTS: Those costs, planned for a relatively long time-span,that cannot be eliminated or even cut back without having a major effect onprofits or the organization's objectives.

COMMON FIXED COSTS: Those fixed costs that are related to all or several of the organization's segments (products, product groups, markets,services, etc.) and cannot therefore be identified uniquely with any particular segment.

CONSERVATISM CONCEPT/CONVENTION: See prudence concept/convention.

CONSISTENCY CONCEPT/CONVENTION: The principle that there isuniformity of accounting treatment of like items within each accounting periodand from one period to the next. (CIMA definition)

CONSOLIDATION: The aggregation of the constituent financial statements

of group companies as if they were the accounts of a single organization.

CONTINUOUS BUDGET: See rolling budget.

CONTRIBUTION: The difference between sales value and the variable costof those sales, expressed either in absolute terms or as a contribution per unit or as a percentage of sales. (Based on C1MA definition.)

CONTRIBUTION COSTING: See marginal costing.

CONTRIBUTION RATIO: See contribution to sales ratio.



CONTRIBUTION TO SALES RATIO: The relationship between revenue andthe contribution that it generates. For example, if a product sells for £10 andgenerates £3 contribution, its contribution to sales ratio is 30%. Also knownas the contribution ratio and the profit/volume ratio.CONTROLLABLE COSTS: A cost, chargeable to a budget or cost centre,

that can be influenced by the actions of the person who controls the centre.(Based on CIMA definition.) Also known as managed costs.

CONTROL PERIOD: A period (commonly four weeks or one month) duringwhich actual performance is compared against budget for control purposes.

CONVERSION COST: The cost of converting material into finished products,i.e. the sum of direct labour costs, direct material costs and productionoverhead costs. (CIMA definition)

COST ALLOCATION: That part of cost attribution that charges a specificcost to a cost centre or cost unit. (CIMA definition)

COST APPORTIONMENT: That part of cost attribution that shares costsamong two or more cost centres or cost units in proportion to the estimatedbenefit received, using a proxy such as square metres. (CIMA definition)

COST ATTRIBUTION: The process of relating costs to cost centres or costunits using cost allocation or cost apportionment.

COST CENTRE: A location, a function or an activity group for which costsmay be ascertained and related to cost units for control purposes.

COST DRIVER: An activity that generates cost. Particularly related toactivity-based costing.

COST OF GOODS SOLD (COGS): See cost of sales.

COST OF SALES (COS): The sum of direct costs or variable costs of sales plus factory overheads attributable to the turnover . In managementaccounts this may be referred to as a production cost of sales or cost of goods sold. (Based on CIMA definition.)

COST-PLUS PRICING: A method of pricing in which the cost of one unit iscomputed (using absorption costing or marginal costing) and then apercentage mark-up is added.

COST UNIT: A unit of product or service liar which costs are ascertained.(Based on CIMA definition.)



COST-VOLUME-PROFIT (CVP) ANALYSIS: Study of the relationshipbetween variable costs per unit, total fixed costs, level of output, and priceand mix of products sold, and the effect of changes in these upon profit.

CREDIT: An entry in an organization's accounts. A decrease in the

organization's assets or an increase in its liabilities.

CREDITOR: A person or an organization to whom money is owed. (CIMAdefinition) Generally, the term is applied to those whose invoices will be paidwithin a short period of time, such as suppliers (trade creditors). Those towhom longer-term debts (such as long-term loans) are owed are oftendescribed as creditors amounts falling due after one year .

CREDITORS' TURNOVER: A ratio that relates the total money owed to

creditors (generally suppliers) at a particular date to the current rate of purchase of the goods and services supplied. This is normally expressed incalendar days, indicating the average time taken to pay for goods andservices bought on credit.

CURRENT ASSETS: Cash or other assets (e.g. stocks, debtors, short-terminvestments) that are likely to be converted into cash in the normal course of trading. (Based on CIMA definition.)

CURRENT COST ACCOUNTING (CCA): A system of accounting based on aconcept of capital that is represented by the net operating assets of anorganization. These net operating assets (fixed assets, stocks andmonetary working capital) are the same as those included under historiccost accounting, but in the current cost accounts the fixed assets and stocksare normally expressed at current price levels. The objective of current costaccounts is to provide guidance for management, shareholders and otherson such matters as the financial viability of the organization and distributiondecisions.

CURRENT LIABILITIES: Liabilities that all organizations would normallyexpect to settle within a relatively short period (normally one year), e.g.creditors, dividends and tax due for payment; also that part of a long-termloan due for repayment within one year.

CURRENT RATIO: One of two common working capital solvency ratios (theother being the quick ratio or acid test or liquidity ratio). This one is anoverall test of liquidity, measuring whether or not current assets will remainafter current liabilities have been paid off.

D



DEBENTURE: A particular form of long-term loan.

DEBIT: An entry in an organization's accounts. An increase in theorganization's assets or a decrease in its liabilities.

DEBTOR: A person or an organization who owes money to the organization.Primarily, customers who have yet to pay for goods or services provided.

DEBTORS' TURNOVER: A ratio that relates the total money owed bydebtors (generally customers) at a particular date to the current rate of saleof the goods or services purchased. This is normally expressed in calendar days, indicating the average time taken to pay for goods and services boughton account.

DECLINING BALANCE DEPRECIATION: A method of depreciation,applying a constant percentage (determined by management) to the period-end net book value of a fixed asset over its useful life. Also known asreducing balance.

DEPRECIABLE BASE: The cost of an asset less any anticipated resale or residual value. The resulting figure is then depreciated over the useful life of the asset.

DEPRECIATION: The internal charge made by an organization against itsrevenue, to provide for the use and/or progressivedeterioration/obsolescence of its fixed assets within operations. This is anexample of the matching concept/ convention.

DIRECT COSTS: Costs that can be traced directly to units of production (or other activity of the organization). Typically, these may include materialsused, production labour and certain production expenses.

DIRECT FIXED COSTS: Those fixed costs that are uniquely incurred in an

identifiable segment (product, product group, service, market, etc.) of theorganization's activities.

DIRECT LABOUR: That part of an organization's work force directlyconcerned with the manufacture of goods or the provision of services.

DIRECT LABOUR COST PERCENTAGE RATE: A method of chargingoverheads to cost centres. Calculated by dividing the budgeted or estimated overhead costs attributable to a cost centre by the amount of

direct labour cost expected to be incurred (or which would relate to workingat normal capacity) and expressing the result as a percentage.



DIRECT LABOUR HOUR RATE: A method of charging overheads to costcentres. Calculated by dividing the budgeted or estimated overhead costsattributable to a cost centre by the number of direct labour hours expectedto be worked (or which would relate to working at normal capacity).

DIRECT MATERIAL PRICE VARIANCE: The difference between the normaldirect material cost of the actual production volume and the actual cost of direct material.

DIRECT MATERIAL USAGE VARIANCE: The difference between thenormal quantity specified for the actual production and the actual quantityused, at normal purchase price. Also known as the material quantityvariance.

DISCOUNTED CASH FLOW (DCF): An evaluation of the future net cashflows generated by a capital investment project, by discounting them to their present-day value. (Based on CIMA definition.)

DIVIDEND: A distribution made to shareholders in proportion to the number of shares that they hold, generally from post-tax profits. An 'interim' dividendis paid half yearly, the 'final' dividend at the year end.

DOUBLE-ENTRY ACCOUNTING: The principle of ensuring that themonetary value of any transaction is recorded so that the balance sheetremains in balance.

DOUBLE-ENTRY BOOKKEEPING: The recording of the monetary value of transactions and their impact within the accounting records of anorganization. The recording system reflects the need for at least two entriesfor the balance sheet to remain in balance.

E

EARNINGS: Generally the post-tax profits of an organization which, in effect,belong to the shareholders either to take out (dividends) or to leave in(reserves).

EARNINGS PER SHARE (EPS): An investors' ratio calculated as:

Earnings for the year Number of shares in issue

EXPENSES: Expenditures that are chargeable to the trading activities of anaccounting period.



F

FINANCIAL ACCOUNTING: Reporting how the organization has performedin the recent past, principally for the benefit of 'outsiders' through theorganization's financial statements. The work of financial accountants.

FIRST IN, FIRST OUT (FIFO): A method of pricing the issue of materialusing, first, the purchase price of the oldest unit in stock. (CIMA definition)

FIXED ASSETS: Those assets that would normally remain in theorganization to enable it to carry on its business (e.g. plant and machinery,vehicles, property) for longer than a year. Also called long-lived assets.

FIXED BUDGET: A budget that is designed to remain unchanged

irrespective of the level of output or turnover attained.

FIXED COSTS: Costs that do not vary as the level of activity varies (e.g. if sales doubled many administrative costs would be unaffected and thus wouldbe regarded as fixed).

FLEXIBLE BUDGET: A budget that, by recognizing the differences inbehaviour between fixed costs and variable costs in relation to fluctuationsin output, turnover or other variable factors such as number of employees, isdesigned to change appropriately with such fluctuations. (Based on CIMAdefinition.) Also known as the variable budget.

FUNDS FLOW STATEMENT: One of an organization's financial statementswhich shows the way in which funds have been generated and used by theorganization and how any resulting surplus of liquid assets has beenapplied or any deficiency financed. It provides a link between the balancesheet at the start of the period, the profit and loss account for the period,and the balance sheet at the end of the period, and forms part of the auditedaccounts of the company. Also known as the source and application of

funds statement.

G

GEARING: The relationship between the different sources of capital (inmonetary terms) comprising the total capital employed of an organization.For example, an organization with, say, over 50 per cent of its capitaloriginating from external sources such as bank loans could be termed highlygeared. Conversely, the higher the proportion of shareholders' funds the

lower the gearing. Also known as leverage.



GOAL CONGRUENCE: The situation in which each individual, in attemptingto satisfy his or her own interests, is also making the greatest contribution tothe objectives of the enterprise.

GOING CONCERN CONCEPT/CONVENTION: The assumption, in

producing the financial statements, that the organization will continue for theforeseeable future.

GOODWILL: An intangible asset that appears on some balance sheetsunder fixed assets. Generally the difference between the price paid for thepurchase of a subsidiary company and the book value of the subsidiary. Maybe expressed (CIMA definition) as the difference between the value of anorganization as a whole and the aggregate of the fair value of its separableidentifiable assets.

GROSS MARGIN: See gross profit margin.

GROSS PROFIT: Sales revenue less cost of sales, but before deduction of overheads such as selling costs, administration costs and financial costs.

GROSS PROFIT MARGIN: The difference between sales and the cost of goods or services sold. Also known as the gross margin.

H

HISTORIC COST ACCOUNTING: A method of accounting that does notmake allowance for the effects of inflation. A system of accounting in whichall values (in revenue and capital accounts) are based on the costs actuallyincurred or as revalued from time to time.

HOLDING COSTS: The cost of holding stocks, which may include the costsof interest paid or lost, deterioration costs, pilferage costs, storage costs,insurance costs and obsolescence costs.

I

INDIRECT COSTS: Costs that cannot be directly traced to units of production(or other activity of the organization). Typically, these may include propertycosts, administration costs and selling costs. Also known as overheads.

INTANGIBLE ASSET: An asset that does not have a physical identity, e.g.trademark, patent, goodwill.

INTERNAL RATE OF RETURN (IRR): The rate of return at which the cost of a capital investment project and its future cash flows balance out.



INVESTMENT: Expenditure by an organization in anticipation of obtaining areturn at some future time.

INVESTMENT APPRAISAL: The use of accounting and mathematical

techniques to establish the likely returns from particular investment projects;particularly applied to cash flows.

IRRELEVANT COSTS: Costs that are irrelevant to a particular decisionbecause they will be unaffected by that decision. (Costs can be irrelevant toone decision but relevant to another. See relevant costs.)

ISSUED SHARE CAPITAL: Shares actually issued and held byshareholders. Normally, in the UK, the face value (par value, nominal value)

of the shares of an organization that have been issued are recorded at facevalue, regardless of what price they realized when sold or what price (for public companies) they are currently attracting.

L

LABOUR EFFICIENCY VARIANCE: The difference between the standardhours for the actual production achieved and the hours actually worked,valued at the standard labour rate.

LABOUR RATE VARIANCE: The difference between the standard and theactual direct labour rate per hour for the total hours worked.

LAST IN, FIRST OUT (LIFO): A little used method of pricing the issue of material using the purchase price of the latest unit in stock. (CIMA definition)

LEAST-SQUARE METHOD: A mathematical technique for finding thestraight line that best fits a series of points on a graph.

LEVERAGE: See gearing.

LIABILITIES: The financial obligations of an organization both internal (e.g.to shareholders) and external (e.g. to creditors, debenture holders and, inthe case of a bank loan or overdraft, to a bank). (Based on CIMA definition.)

LIMITED COMPANY: An organization which, in the eyes of the law, is aseparate entity, apart from its shareholders. The shareholders' liability to thirdparties in the event of company failure is limited to their capital contributions

and any reserves owed to them.



LINEAR PROGRAMMING: A series of mathematical calculations used tofind the optimum combination of a number of factors through the constructionof a model. Often used in examining the most profitable use of scarceresources within an organization.

LINEARITY: The assumption by accountants and managers that revenuesand costs vary in strict proportion to the level of activity.

LIQUID ASSETS: Current assets that are in the form of cash, or that canrapidly be converted into cash. Generally, stocks are not regarded as liquidassets.

LIQUIDITY: The level of cash and assets readily convertible to cash, relativeto the expected calls to be made on them (i.e. relative to current liabilities).

This may be expressed as the liquidity ratio (or quick ratio or acid test).

LOANS: See overdrafts and loans.

LONG-LIVED ASSETS: Assets which, when purchased, are expected tohave a useful life of more than one year. Also known as fixed assets.

LONG-TERM LIABILITY: A liability that does not have to be met within oneyear.

LONG-TERM LOAN(S): See overdrafts and loans.

M

MACHINE HOUR RATE: A method of charging overheads to cost centres.Calculated by dividing the budgeted or estimated overhead costs attributed toa machine or group of similar machines by the appropriate number of machine hours (the number of hours for which the machine or group of machines is expected to be operated, the number of hours that would relate

to normal working for the factory or full capacity). (Based on CIMA definition.)

MANAGED COSTS: See controllable costs.

MANAGEMENT ACCOUNTING: The provision of financial information to thevarious levels of management within the organization for the purposes of planning, decision making, and monitoring and controlling performance.

MANAGEMENT BY EXCEPTION: Control and management of costs and

revenues by concentrating on those instances where significant variancesoccur and are highlighted by an operational control system.



MARGINAL COSTING: The approach to costing in which only the variablecosts are charged to cost units. The fixed costs attributable to the relevantperiod are not apportioned to individual units or activities, but are met out of the total contribution generated.

MARGINAL COSTS: See variable costs.

MARGIN OF SAFETY: The excess (if any) of budgeted (or capacity) level of activity over the level of activity required to break even, sometimesexpressed as a percentage of budgeted or capacity level of activity. For example, if break even is 8000 units and budgeted sales are 10,000 units,the budget has a 20 per cent margin of safety.

MASTER BUDGETS: The overall budgets of an organization, built up from a

range of individual budgets and comprising the cash budget, the forecastprofit and loss account, and the forecast balance sheet.

MATCHING CONCEPT/CONVENTION: See accruals concept/convention.

MATERIALITY CONCEPT/CONVENTION: Acceptance that there are sometransactions or events that are not significant enough for accountants todisclose, while also accepting that those that are significant enough shouldbe disclosed separately.

MATERIAL PRICE VARIANCE: See direct material price variance.

MATERIAL QUANTITY VARIANCE: See direct material usage variance.

MINORITY INTEREST: Shares in a subsidiary company other than thoseheld by the parent company, plus the appropriate portion of accumulatedreserves.

MONEY MEASUREMENT CONCEPT/CONVENTION: The convention that

financial accounting information relates only to those activities that can beexpressed in money terms.

N

NET BOOK VALUE: The cost of an asset less its accumulated depreciationto date. Also known as the written-down cost.

NET CAPITAL EMPLOYED: See capital employed.

NET CASH FLOW: The net inflow or outflow of cash (i.e. total cash in lesstotal cash out) resulting from proceeding with an investment project.



NET CURRENT ASSETS: See working capital.

NET PRESENT VALUE (NPV): The value obtained by discounting by achosen percentage all cash outflows and inflows attributable to a capital

investment project. (Based on CIMA definition.)NET PROFIT: See net reported profit.

NET REALIZABLE VALUE: The price at which assets are estimated to besaleable less any further costs that would be incurred in selling them.

NET REPORTED PROFIT: The profit remaining after deducting all expensesfrom sales. Also known as net profit.

NET WORKING CAPITAL: See working capital.

NET WORTH: The book value of an organization as reflected by the value of shareholders' funds shown on the balance sheet.

O

OBJECTIVITY CONVENTION: The convention of using reliable facts relatingto one way of valuing an asset rather than estimates relating to some other way, even if the latter is more realistic.

OPERATING LEVERAGE: The relationship between fixed and variablecosts. Also known as operational gearing.

OPERATING PROFIT: The profit remaining after deducting all operatingexpenses (not cost of capital expenses) from sales revenue. Can also becalculated by adding back the cost of capital interest to net reported profitbefore tax.

OPERATING STATEMENT: An internal management control documentgenerally produced at frequent regular intervals, which reports actual costsand/ or revenues, and which usually compares these with budget and showsvariances.

OPERATIONAL GEARING: See operating leverage, gearing.

OPPORTUNITY COST: The value of a benefit sacrificed in favour of analternative course of action. (CIMA definition)



ORDINARY SHARES: Shares which entitle the holders to the remainingdivisible profits (and, in a liquidation, the assets) after prior interests, e.g.creditors and prior charge capital, have been satisfied. (CIMA definition)

OVERDRAFTS AND LOANS: An overdraft is money borrowed, nominally for

a short period, the amount of which may fluctuate from day to day. Loans arefinite amounts of money borrowed for finite periods; some are short-term, i.e.for less than one year, others are long-term, i.e. for more than one year.

OVERHEAD ABSORPTION RATE: The basis on which indirect costs arecharged to individual products or services. Common methods are directlabour cost percentage rate, direct labour rate and machine hour rate.

OVERHEAD EFFICIENCY VARIANCE: The difference between the standard

overhead cost for the production achieved and the standard overhead costfor the actual hours taken. (Based on CIMA definition.)

OVERHEAD EXPENDITURE VARIANCE: The difference between budgetedand actual overhead expenditure. (Based on CIMA definition.)

OVERHEAD(S): See indirect costs.

OVERHEAD VOLUME VARIANCE: The difference between the standardoverhead cost of the actual hours taken and the flexible budget allowancefor the actual hours taken. (Based on CIMA definition.)

P

PAYBACK PERIOD: The number of years that will elapse before the cashoutlays on a capital investment project are recovered.

POSITION STATEMENT: Another name for the balance sheet.

PREFERENCE SHARES: These are normally fixed-dividend paymentshares, whose holders receive dividends in preference to ordinaryshareholders but after debenture and loan stock holders. Holders may alsohave a prior claim to the repayment of capital in the event of liquidation.

PREPAYMENTS: Expenditure on goods or services for future benefit whichis to be charged to future operations, e.g. rental paid in advance. (CIMAdefinition)

PRE-TAX PROFIT: See profit before tax.

PRICE-EARNINGS RATIO: An investors' ratio calculated as:



Current stock market price of one shareMost recent available earnings per share

PRIME COSTS: The direct costs of production, generally comprising direct

material costs, direct labour costs and other direct production expenses.

PRIORITY-BASE BUDGETING: See zero-base budgeting.

PRODUCTION OVERHEADS: The indirect costs of production generallycomprising any labour and materials not unique to one product or service,and indirect expenses of running the plant and production premises.

PROFIT: The figure representing the amount by which revenue exceeds

expenses.

PROFITABILITY INDEX: A statistic used in investment appraisal tosupplement internal rate of return and/or net present value, calculated as:

Present value of cash inflows from projectPresent value of cash outflows from project

(i.e. the net present value of each monetary unit value, e.g. £1, $1, investedin a project).

PROFIT AND LOSS ACCOUNT: A summary of an enterprise's transactionsover a stated period (usually one year), which shows revenue generated, therelated costs and thus the profit or loss for one period. It may also show theappropriation of profit before tax into taxation, dividends and reserves.

PROFIT BEFORE TAX: The profit of the organization after all its costs havebeen set against its revenues, but before the appropriation of corporationtax, dividends and reserves. Sometimes referred to as net reported profit,

although this term can be ambiguous; sometimes known as pre-tax profit.

PROFIT VARIANCE: The difference between the standard profit on thebudgeted sales volume and the actual profit for a specific period. (Based onCIMA definition.)

PROFIT/VOLUME (P/V) RATIO: See contribution to sales ratio.

PRUDENCE CONCEPT/CONVENTION: The convention of using the lowest

of all reasonable values for an asset and of not anticipating revenue or profit. Also known as the conservatism concept/convention.



Q

QUICK RATIO: A prime measure of an organization's liquidity, defined as:

Liquid assets

Current liabilities

Also known as the acid test or the liquidity ratio.R

RATE OF RETURN PRICING: A more sophisticated version of cost-pluspricing, in which the mark-up on unit cost is calculated with regard to theorganization's required rate of return on capital employed.

REALIZATION CONVENTION: The concept that profit is only accounted for when it is realized and not when it can be recognized.

RELEVANT COSTS: Costs that will be incurred only if a course of actionbeing considered is taken, and which are therefore relevant to makingspecific management decisions. See also avoidable costs.

RELEVANT RANGE: The range of activity level within which fixed costsand variable costs behave in a linear fashion according to their definitions(i.e. fixed costs remain unchanged and variable costs vary in directproportion to the activity level).

RESERVES: The value of shareholders' funds in excess of the par value of their shares. Reserves can comprise:

· the cumulative value of reinvested profits (also known as retentionsor

retained earnings or retained profits)

· appreciation in value of fixed assets

· share premium.

RESPONSIBILITY ACCOUNTING: A system of accounting that segregatesrevenues and costs into areas of personal responsibility in order to assessthe performance attained by people to whom authority has been assigned.

RESPONSIBILITY CENTRE: A part of the organization for which a

nominated manager has direct responsibility for performance.

RETAINED EARNINGS: See reserves.



RETAINED PROFIT: Profit which has not been distributed as dividends toshareholders but has been retained within the organization.

RETENTIONS: See reserves.

RETURN ON CAPITAL EMPLOYED (ROCE): A ratio, usually calculated as:

Profit before tax + interest paidCapital employed x 100

RETURN ON NET ASSETS (RONA): See return on capital employed.

RETURN ON SALES: A ratio usually calculated as:

Profit before taxSales income x 100

or

Profit before tax + interest paidSales income x 100

REVENUE: See turnover .

REVENUE CENTRE: A responsibility centre where the manager isresponsible for generating revenue.

REVISION VARIANCE: The difference between an original and a revisedstandard cost.

ROLLING BUDGET: A continuously updated budget in which, as one periodpasses, another is added (i.e. a one-year budget would have a new month or

quarter added as each month or quarter passed). It is beneficial where futurecosts and/or activities cannot be forecast reliably. (Based on CIMAdefinition.) Also known as the continuous budget.

S

SALES VOLUME-PROFIT VARIANCE: The difference between the normalquantity of units sold and the actual units sold, priced at the normal profit per unit. (Based on CIMA definition.)



SEGMENT MARGIN: The contribution made by an individual segment (e.g.product, product group, service, market, etc.) of an organization's activitiesless any direct fixed costs attributable to that segment.

SEGMENT REPORTING: The use of marginal costing techniques to

examine the profitability of individual segments (e.g. product, product group,service, market, etc.) of an organization's activities.

SELLING PRICE VARIANCE: The difference between the actual sellingprice per unit and the standard selling price per unit, multiplied by the actualnumber of units sold. (Based on CIMA definition.)

SEMI-VARIABLE COSTS: Costs that include both fixed cost and variablecost components, i.e. costs that vary as the level of activity varies but not in

strict proportion. For example, a telephone bill will be larger in a quarter whenmore calls have been made, but will not double if the number of callsdoubles, as long as any rental element remains unchanged.

SET-UP COSTS: The costs involved in setting up a venture or an activity(e.g. a company, machinery, etc.) to produce a batch of goods.

SHARE CAPITAL: See issued share capital.

SHAREHOLDERS' FUNDS: Issued share capital plus reserves, i.e. thatpart of the capital in the organization that is owned by the shareholders.

SHAREHOLDERS' INTEREST: See shareholders' funds.

SHORT-TERM INVESTMENT: An investment which is intended to last lessthan one year.

SHORT-TERM LOAN(S): See overdrafts and loans.

SOLVENCY: A state in which an organization can pay its debts as they falldue.

SOURCE AND APPLICATION OF FUNDS STATEMENT: See funds flowstatement.

STABILITY CONVENTION: The assumption that money does not change invalue when, for example, consolidating the values of two identical assetspurchased some years apart at different prices.

STANDARD COSTS: Carefully predetermined costs that managementestablish and use as a basis fbr comparison with actual costs.



STEP COSTS: Those fixed costs that within certain limits of activity levelare unchanged, but which step up or down to a new level when these limitsare exceeded.

STOCK(S): That portion of an organization's assets held for further production and/or sale.

STOCK TURNOVER: A ratio that measures the speed at which rawmaterials or stocks for resale are being consumed or sold.

STRAIGHT LINE DEPRECIATION: A method of depreciation which dividesthe depreciable base relating to a fixed asset by the number of years of anticipated useful life, the resulting figure being the annual depreciation

charge over the useful life of the asset.

SUNK COSTS: Those irrelevant costs that have already been incurred andthus play no part in a particular decision.

SURPLUS(ES): The difference between income and expenditure in somepublic and voluntary sector concerns, equating to the term profit(s) incommercial concerns.

T

TOTAL ASSETS: The total net book value of all the assets in theorganization.

TOTAL LIABILITIES: The total money owed by the organization to 'outsiders'and to its shareholders.

TURNOVER: The total sales income of the organization for a period,regardless of whether or not customers have yet paid. Also known as the

sales revenue.

U

UNAVOIDABLE COSTS: Those costs which would still be incurredirrespective of the organization opting for a particular course of action.

V

VALUE ADDED: See added value.

VARIABLE BUDGET: See flexible budget.



VARIABLE COSTING: See marginal costing.

VARIABLE COSTS: Costs that vary depending on (usually) the level of activity (sales level or production level). For example, raw material costs

would generally double if production or sales doubled and thus would beregarded as variable. Also known as marginal costs.

VARIANCE: The difference between planned, budgeted or standard costand actual cost (and similarly in respect of revenues). (CIMA definition.)Variances are generally referred to as favourable or adverse, depending onwhether they increase or decrease profit.VARIANCE ANALYSIS: The analysis of variances arising in a standardcosting system into their constituent pans. (Based on CIMA definition.)

W

WORKING CAPITAL: The capital available for conducting the day-to-dayoperations of the organization. Usually defined as current assets lesscurrent liabilities. (Based on C1MA definition.) Also known as net workingcapital and net current assets.

WORKING-CAPITAL CYCLE: The cycle associated with the flow of cashthrough the purchase of stocks, receipt of money owed and payments of money owing.

WRITTEN-DOWN COST: See net book value.

Z

ZERO-BASE BUDGETING: A method of budgeting whereby all activities arere-evaluated each time a budget is set. Discrete levels of each activity arevalued and a combination chosen to match funds available. (CIMA definition)

Sometimes called priority-base budgeting.

Documents

MBA Supplementary Resources Finance Glossary