Key Concepts in Accounting: Financial, Managerial, and Cost

Financial Accounting

The use of accounting information for reporting to parties outside the organization.

Managerial Accounting

Specialists in using the tools of managerial accounting to help the organization and its managers operate effectively.

Chief Financial Officer (CFO)

The executive responsible for all accounting and finance functions in an organization.

Generally Accepted Accounting Principles (GAAP)

Accountants must follow GAAP (Generally Accepted Accounting Principles).

Activity Accounting

The collection of financial or operational performance information about significant activities in an enterprise.

Cost of Goods Sold

The expense measured by the cost of the finished goods sold during a period of time.

Period Costs

Costs that are expensed during the time period in which they are incurred. (Selling and Administrative Costs, Research and Development, selling costs)

Product Cost

Cost associated with goods for sale until the time period during which the products are sold, at which time the costs become expenses.

Sunk Costs

Costs that were incurred in the past and cannot be altered by any current or future decision.

Gross Profit

Amount of revenues left after deducting just the costs that have been classified as cost of sales or cost of products (or goods) sold.

Operating Income

Profits from operations, excluding nonoperating items such as interest income, interest expense, and taxes.

Variable Cost

A cost that changes in total in direct proportion to a change in an organization’s activity. (If activity increased by 20 percent, total variable cost increases by 20 percent also) (examples: cost of metal will increase by 5% if automobile production increases by 5%)

Fixed Cost

A cost that does not change in total as activity changes. (If output increases or decreases by 20%, total fixed cost remains the same. examples include depreciation of furniture and equipment, cost of property taxes, salary of an employee.)

Direct Material

Raw material that is physically incorporated in the finished product.

Direct-Labor Cost

The cost of salaries, wages, and fringe benefits for personnel when they are working directly on the production of goods or services.

Manufacturing Overhead

All manufacturing costs other than direct-material and direct-labor costs. (Sum of indirect labor, materials, and any other overhead costs)

Indirect Materials

Materials that either are required for the production process to occur but do not become an integral part of the finished product, or are consumed in production but are insignificant in cost.

Indirect Labor

All costs of compensating employees who do not work directly on the firm’s product but who are necessary for production to occur.