Accounting

 

INCOME  Money received by a business from its commercial activities. See 'Revenue'.

INSOLVENT  A company is insolvent if it has insufficient funds (all of its assets) to pay its debts (all of its liabilities). If a company's liabilities are greater than its assets and it continues to trade, it is not only insolvent, but in the UK, is operating illegally (Insolvency act 1986).

INTANGIBLE ASSETS  Assets of a non-physical or financial nature. An asset such as a loan or an endowment policy are good examples. See tangible assets .

INVENTORY  A subsidiary ledger which is usually used to record the details of individual items of stock. Inventories can also be used to hold the details of other assets of a business.

INVOICE  A term describing an original document either issued by a business for the sale of goods on credit (a sales invoice) or received by the business for goods bought (a purchase invoice).

JOURNAL(S)  A book or set of books where your transactions are first entered.

JOURNAL ENTRIES  A term used to describe the transactions recorded in a journal.

LEDGER  A book in which entries posted from the journals are re-organised into accounts..

LIABILITIES  This includes bank overdrafts, loans taken out for the business and money owed by the business to its suppliers. Liabilities are included on the right hand side of the balance sheet and normally consist of accounts which have a credit balance.

LIFE-CYCLE OF BUSINESS The seven stages of business life: seed stage, start-up stage, growth stage, established stage, expansion stage, decline stage, and exit stage.

LIFO  Last In First Out. A method of valuing stock .

LILO Last In Last Out. A method of valuing stock .

LONG-TERM LIABILITIES Borrowings which are not due to be repaid for at least 12 months. These comprise long-term bank loans and debentures, which are borrowings from the public and are listed on the Stock Exchange in the same manner as ordinary shares. Long-term loans may often be secured against the company's assets.

 

MANAGEMENT ACCOUNTING  Accounts and reports are tailor made for the use of the managers and directors of a business (in any form they see fit - there are no rules) as opposed to financial accounts which are prepared for the Inland Revenue and any other parties not directly connected with the business.

MATCHING PRINCIPLE  A method of analyzing the sales and expenses which make up those sales to a particular period (eg. if a builder sells a house then the builder will tie in all the raw materials and expenses incurred in building and selling the house to one period - usually in order to see how much profit was made).

MONEY MEASUREMENT  All company assets and liabilities are measured in a common unit, money. Intangible assets such as goodwill and management skill which are of value to the company are left out of the accounts, as they cannot accurately be measured in money terms.

NET LOSS  The value of expenses less sales assuming that the expenses are greater (i.e. if the profit and loss account shows a debit balance).

NET PROFIT  The value of sales less expenses assuming that the sales are greater (i.e. if the profit and loss account shows a credit balance).

NET WORTH  See EQUITY

NOMINAL LEDGER  A ledger which holds all the nominal accounts of a business. Where the business uses a subsidiary ledger like the sales ledger to hold customer details, the nominal ledger will usually include a control account to show the total balance of the subsidiary ledger (a control account can be termed 'nominal' because it doesn't relate to a specific person). 

OBJECTIVITY As far as possible accounts should be based on facts which are measurable and can be independently verified.

OVERHEADS  These are the costs involved in running a business. They consist entirely of expense accounts (e.g. rent, insurance, petrol, staff wages etc.).

POSTING  The copying of entries from the journals to the ledgers.

PROFIT  The excess of revenue over expenses. If expenses are greater than revenues then a loss (i.e. negative profit) results. There are many definitions of profit which can be best appreciated with reference to the Profit and Loss Statement.

PROFIT AND LOSS ACCOUNT  An account made up of revenue and expense accounts which shows the current profit or loss of a business (i.e. whether a business has earned more than it has spent in the current year). Often referred to as a P&L.

PRO-FORMA INVOICE  An invoice sent that requires payment before any goods or services have been dispatched.

PRUDENCE AND CONSERVATISM This concept is designed to balance the natural optimism of the businessman! It encourages the accountant to be prudent by recognizing revenue only when it is realized in an acceptable form whilst providing for all expenses and losses as they are known. For example, if a company gives a potential customer a quotation for some building work, the amount quoted could not be treated as a sale. When a sales invoice is eventually raised, the 'sale' can be recognized.

PURCHASE LEDGER  A subsidiary ledger which holds the accounts of a business's suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger.

RAW MATERIALS  This refers to the materials bought by a manufacturing business in order to manufacture its products.

REALISATION PRINCIPLE  The principle whereby the value of an asset can only be determined when it is sold or otherwise disposed of, ie. its 'real' (or realized) value.

RECEIPT  A term typically used to describe confirmation of a payment - if you buy some petrol you will normally ask for a receipt to prove that the money was spent legitimately.

RECONCILING  The procedure of checking entries made in a business's books with those on a statement sent by a third person (e.g. checking a bank statement against your own records).

RETAINED EARNINGS This is the amount of money held in a business after its owner(s) have taken their share of the profits.

REVENUE The total exchange value of the goods or services of a business which have been transferred to a customer in return for cash or some other asset, e.g. debtors. The sales and any other taxable income of a business (e.g. interest earned from money on deposit).

SALES  Income received from selling goods or a service. See Revenue .

SALES LEDGER  A subsidiary ledger which holds the accounts of a business's customers. A control account is held in the nominal ledger (usually called a debtors' control account) which shows the total balance of all the accounts in the sales ledger.

SEPARATE ENTITY The company is recognized as a legal 'person' in its own right entirely separate from its owners and managers.

 

SHARE PREMIUM  The extra paid above the face value of a share. Example: if a company issues its shares at $10 each, and later on you buy 1 share on the open market at $12, you will be paying a share premium of $2.

STANDARD ACCOUNTING PRACTICE A set of rules that a company must follow when reporting information on its financial statement. The standard accounting practice guidelines allow companies to be compared to each other because they have followed the same rules. The standard methods in the U.S. are referred to as Generally Accepted Accounting Principles.

STOCK  This can refer to the shares of a limited company (see Shares ) or goods manufactured or bought for re-sale by a business.

STOCK VALUATION  Valuing a stock of goods bought for manufacturing or re-sale.

STRAIGHT-LINE DEPRECIATION  Depreciating something by the same (i.e. fixed) amount every year rather than as a percentage of its previous value. Example: a vehicle initially costs $10,000. If you depreciate it at a rate of $2000 a year, it will depreciate to zero in exactly 5 years. 

T ACCOUNT A particular method of displaying an account where the debits and associated information are shown on the left, and credits and associated information on the right.

TANGIBLE ASSETS  Assets of a physical nature. Examples include buildings, motor vehicles, plant and equipment, fixtures and fittings. See Intangible assets.

TAXATION This comprises the corporation tax levied on the current period's profits which is due for payment in the next year.

TRADING ACCOUNT  An account which shows the gross profit or loss of a manufacturing or retail business, i.e. sales less the cost of sales.

TRANSACTION  Two or more entries made in a journal which when looked at together reflect an original document such as a sales invoice or purchase receipt.

TRIAL BALANCE  A statement showing all the accounts used in a business and their balances.

TURNOVER  The income of a business over a period of time (usually a year).

UNDEPOSIRED FUND ACCOUNT An account used to show the current total of money received (i.e. not yet banked or spent). The 'funds' can include money, checks, credit card payments, banker's drafts etc. This type of account is also commonly referred to as a 'cash in hand' account.

VALUE-ADDED TAX  (VAT - applies to many countries): Value Added Tax, or VAT as it is usually called is a sales tax which increases the price of goods. At the time of writing the UK VAT standard rate is 17.5%, there is also a rate for fuel which is 5% (this refers to heating fuels like coal, electricity and gas and not 'road fuels' like petrol which is still rated at 17.5%). VAT is added to the price of goods so in the UK, an item that sells at £10 will be priced £11.75 when 17.5% VAT is added.

WAGES  Payments made to the employees of a business for their work on behalf of the business. These are classed as expense items and must not be confused with 'drawings' taken by sole-proprietors and partnerships (see Drawings ).

WORK IN PROGRESS  The value of partly finished (i.e. partly manufactured) goods.

WRITE-OFF  Depreciating an asset to zero in one go.

WORKING CAPITAL Current assets minus current liabilities.

 

 

 

 

 

 

 

 

UNIT 9                  MANAGERIAL  ACCOUNTING

9.1 Getting started

       Management accounting aims to provide management with quantitative and financial information for better decision making and is, therefore, principally for internal consumption.

      The emphasis of management accounts is to adopt a wide approach to planning and control, not only providing information on actual costs and revenues but also on expected costs and revenues. This enables projections to be made and future plans detailed in a numerate form. Management accounts aim to record, analyze, interpret and finally report to management on cost and revenue data.

 

Discuss the following points.

1. Accountancy has two distinct branches: Financial Accounting and Management Accounting. What is the difference between them?

2. How do management accounts aid the planning and control of present and future events?

3. Do you think these branches could exist without each other?

 

9.2 Look through the following vocabulary notes which will help you understand the text and discuss the topic.

 

management accounting	управленческий учет
to aim to do smth	иметь целью сделать ч/л
quantitative	количественный
internal consumption	внутреннее потребление
to adopt	принять
a wide approach	широкий подход
actual costs and revenues	реальные/фактические затраты и доходы
expected	ожидаемый
in a numerate form	в числовой форме
pricing	ценообразование
costing methods	методы учета затрат
cost	стоимость, затрата, издержка
production	производство
sales	сбыт, продажи
distribution	распределение товара от производителя к потребителю
administration	управление, администрация
cost centers	учетно-калькуляционное подразделение, центр затрат
cost unit	единица калькуляции издержек
car-hire	аренда автомобилей
direct costs/prime costs	прямые затраты/издержки
indirect costs	косвенные затраты/издержки
fixed costs	постоянные затраты/издержки
variable costs	переменные затраты/издержки
semi-variable costs	полупеременные затраты/издержки
marginal costs	предельные затраты/издержки
overhead costs	накладные затраты/издержки
hence	стало быть, значит, поэтому
absorption costing	калькуляция себестоимости с полным распределением затрат
marginal costing	калькуляция себестоимости по предельным затратам
contribution	контрибуция (рассчитывается как разница между продажной ценой selling price и переменными расходами variable costs; является источником для покрытия постоянных расходов fixed costs и формирования прибыли profit.)
break-even analysis	анализ безубыточности
break-even point	точка безубыточности
long run	долгий период
short run	короткий период
time span	временной интервал/диапазон
to allocate	распределять
to charge	начислять издержки, дебетовать
to cover costs	покрывать издержки/затраты
per item	на единицу продукции
to absorb	поглощать, впитывать
absorption	поглощение, распределение
output of the firm	выход продукции фирмы
to alter	изменить
to bear - bore - born/borne	терпеть, нести, переносить
selling price	продажная/отпускная цена
to apportion	пропорционально распределять
Total Revenue	общая сумма дохода
Total Costs	общая сумма затрат
by graph form	графически
linearity	линейная зависимость
over-simplification	слишком большое упрощение
Direct Materials	прямые затраты на материалы
Direct Labor	прямые затраты на труд рабочих
Direct Expenses	прямые расходы
Production Overheads	производственные накладные расходы
Selling Overheads	накладные расходы по сбыту
Administrative Overheads	административные накладные расходы
Distribution Overheads	накладные расходы по распределению товаров
to anticipate market changes	предвидеть изменения рыночной конъюнктуры
in general terms	в общих чертах
on an annual basis	на годовой основе
a budget	бюджет, смета
budgetary control	бюджетный контроль
quantified in monetary terms	исчисляться в денежном выражении
in advance	заранее, предварительно
ratio analysis	анализ коэффициентов
deviations/variances	отклонения
to monitor smth against a plan	мониторировать, наблюдать и сравнивать с планом
feedback	обратная связь
budgetary process	процесс разработки бюджета
master budget	мастер-бюджет, основной бюджет, годовая смета
sales budget	торговая смета
benchmark	точка отсчета, ориентир
marketing and distribution budget	бюджет/смета продвижения товара от производителя к производителю
сost of production budget	бюджет/смета производственных затрат
storage capacity	емкость складских помещений
production capacity	производственная мощность
management by exception	управление по отклонениям
administration budget	бюджет/смета административных расходов
cash budget	кассовый бюджет
forecast balance sheet	предварительный/прогнозируемый  баланс
to communicate	доводить до сведения, сообщать
variance analysis	анализ отклонений
remedial action	меры по исправлению

 

 

 

 

9.3   Reading

Costs and Costing Methods

       A cost is the monetary value of all economic resources used in production of a good or service. The classification and analysis of costs is a valuable aid to running a business organization. Cost information can be used for financial control, planning, pricing, and decision-making.

       Classification of costs There are several ways of classifying costs, each method looking at costs from a different angle. Four such methods analyze costs by function, by type, by behavior and by time.

Function This method groups costs according to the functional department which incurs them, such as production, sales, distribution and administration. Each of these departments would have one or several cost centers (i.e. locations or functions which are readily identifiable and against which costs can be charged). The cost unit is the actual product or service being produced, e.g. in car manufacture the vehicle would be the cost unit whereas for a car-hire firm it may be the rental-mile.

Type Costs can be classed into two types, direct and indirect:

• Direct costs: these are costs which can be directly identified with the item or service being produced such as raw materials and labor specific to the task, e.g. the cotton cloth used in making a shirt and the machinist's time to cut and sew it.
• Indirect costs: these are also known as Overhead Costs and are all those costs incurred in the organization which cannot objectively be allocated to specific output, e.g. rent, insurance, supervision etc.

Direct costs are also known as prime costs and when added to overhead costs they form the total cost as illustrated in Table 1.

 

 

 

 

 

 

Table 1 Types of costs

       Behaviour  Over a given range of production or time some costs tend to be unaffected by the level of output, e.g. factory rent. This type of cost is known as fixed cost. It is important to realize that they are 'fixed' or unchanging only over a range of output and a given time-span.

       Other costs do change with variations in output and are known as variable costs, e.g. raw materials used in each product. A third category could be added called semi-variable costs, which comprise of a fixed element and a variable element. This may apply to items such as power, telephone, water, etc. where there is a fixed charge for rental and minimum usage with an added usage charge thereafter.

       Time The 'short run' period is that amount of time during which some of the factors of production cannot be changed, e.g. the size of factory or the supply of skilled, experienced workers. Therefore in the short run some of the costs remain fixed. The 'long run' is defined as the period when all factor inputs can be changed hence all costs are variable. The time span of short run and long run will differ widely between companies and industries.

       The different ways of classifying costs enable management to apply different approaches to problem solving. This is illustrated by the following costing methods.

       Costing methods Direct costs are easily identified and present little difficulty. Indirect costs, however, relate to the running of the business as a whole in order to facilitate the production process.  These  overhead costs need to be allocated to the products in order to establish a 'full cost' per item so that a selling price can be set which not only covers cost but also ensures a satisfactory profit. To do this each unit of production must be allocated a share of the overheads, so that the total overheads are 'absorbed' by the output of the firm. This is known as absorption costing.

       Marginal costing This costing method adopts the view that in the short run fixed costs cannot alter and have to be borne anyway, whatever the level of production or sales in that period. The variable costs are termed the marginal costs. The difference between the marginal costs and the selling price is the contribution towards the fixed costs. No attempt is made to apportion fixed costs with this method. The total contribution is set against fixed costs. If the contribution is greater than the fixed costs a profit is realized; if not then a loss is made.

       Break-even analysis  Break-even analysis (or cost-volume-profit analysis) makes use of the division of costs into Fixed and Variable in order to determine the minimum output where all costs are just covered by revenue, i.e. the break-even point where Total Revenue equals Total Costs. This provides a minimum output which the firm must achieve in order to avoid a loss and to start making a profit. The break-even point can be found either by calculation or by graph form.

http://www.google.ru/imgres?q=break-even+point&um=1&hl=ru&newwindow=1&sa=N&biw=890&bih=645&tbm=isch&tbnid=C9uqSz04aXL02M:&imgrefurl=http://www.12manage.com/methods_break-even_point_ru.html&docid=Bew9QBf6a5ZFwM&w=447&h=302&ei=wgo_Tpr_FYOg-wavqIWdAg&zoom=1&iact=hc&vpx=185&vpy=106&dur=1562&hovh=184&hovw=273&tx=4&ty=4&page=1&tbnh=138&tbnw=204&start=0&ndsp=9&ved=1t:429,r:0,s:0

Fig. 2 Break-even analysis

       This analysis enables managers to determine an important minimum target. It shows the rate at which profits increase with sales. Levels of profit/loss at any level of output can be read from the graph. However, there are some disadvantages of break-even analysis. It is useful only in the short-run situation and the linearity may be an over-simplification.

 

 

9.4 Comprehension

  9.4.1 Answer the questions using the active vocabulary      and Unit 9 Glossary.

  1. Why is the classification and analysis of costs a valuable aid in management?

2. What are the several ways of classifying costs?

3. How can we classify costs by type?

4. How can we classify costs by behavior?

5. How can we classify costs by time?

6. What is a cost centre?

7. What is the difference between direct and indirect costs?

8. Give the examples of production costs. Are all of the prime costs?

9. Give the examples of overhead costs.

10. What is the difference between fixed and variable costs?

11. Give the examples of semi-variable costs.

12. How do managers use the terms 'long run' and 'short run'?

13. What costing methods do you know?

14. What is the difference between absorption costing and marginal costing?

15. What do you know about marginal costs?

16. Why do you think break-even analysis can be referred to as cost-volume-profit analysis?

17. What is break-even point?

18. What are the advantages and disadvantages of the break-even analysis?

 

9.4.2  Mark these statements T(true) or F(false) according to the information in the Text and Unit 9 Glossary. If they are false say why.

1. By behavior costs can be divided into direct and indirect.

2. By time costs can be divided into fixed and variable.

3. Fixed costs are constant within the relevant range as the activity output varies.

4. Overhead is a budget that reveals planned expenditures for all indirect manufacturing items.

5. A semi-variable cost is an expense which contains both a fixed cost component and a variable cost component.

6. Advertising expenses represent indirect variable costs.

7. Components represent indirect variable costs.

8. Electricity to run machines represents direct fixed costs.

9. Electricity for heating represents indirect variable costs.

10. Factory canteen represents indirect variable costs.

11. Overtime pay represents direct fixed costs.

12. Property tax represents indirect fixed costs.

13. Absorption costing as well as manufacturing costs (materials and labor) allocates part of fixed and variable manufacturing overheads to the cost of every product.