Introduction to Managerial Accounting


absorption costing

expensing method where both variable manufacturing expenses and fixed manufacturing expenses are considered as inventory expenses. Accountants use absorption costing to show inventory valuation that is reported on the balance sheet.

administrative overhead

costs that a company incurs for business activity other than for the production of goods


practice of compiling and analyzing a company's financial records to determine if the company is obeying the accounting standards

bill of materials

list that details the amount and cost of each item that goes into a finished product

cost driver

factor that causes a company to incur expenses because it affects volume, activity levels, or both


process of identifying the expenses or cost involved in the production process; used to help assign pricing

differential cost

difference in total costs between two different or alternate courses of action; used when multiple options are available

direct labor

hours spent producing a product or providing a service that can easily be traced to the product or service

direct materials

raw goods that can be traced directly to or easily identified with a product

financial accounting

exercise of documenting and externally reporting a company's money-related transactions over a specified period of time

fixed cost

expense of operating a company for a specific period of time that remains unchanged despite any change in the company's activity level

generally accepted accounting principles (GAAP)

combination of accounting principles, standards, and procedures that govern the preparation of financial statements

indirect cost

expense that requires allocation but cannot be attributed to a specific product

managerial accounting

exercise of collecting and analyzing a company's financial data in order to make better business decisions

manufacturing overhead

all costs that are a result of producing a product that are not direct materials or direct labor

mixed costs

expenses that combine fixed expenses and variable expenses that both fluctuate and remain steady with volume changes

opportunity cost

loss of possible gains when one alternative is chosen over another alternative

sunk cost

expense that has already been incurred and cannot be undone by any future choice among alternatives

tax accounting

form of accounting that is concerned with whether a company's reporting follows rules imposed by local, state, and federal regulatory bodies

throughput costing

method in which only direct materials are considered inventory costs and other manufacturing costs are expensed as period costs when they are incurred

variable cost

expense that increases or decreases with the level of production

variable costing

method in which all fluctuating expenses from manufacturing are considered as part of inventory expenses