(See related pages)
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| absolute amounts | Dollar totals reported in accounts on financial
reports that can be misleading because they make no reference
to the relative size of the company being analyzed. (See page(s) p. 533) |
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| absorption (full) costing | Practice of capitalizing all product
costs, including fixed manufacturing costs, in inventory and
expensing costs when goods are sold. (See page(s) p. 453) |
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| accounts receivable turnover | Ratio measuring the quality of
accounts receivable, calculated by dividing net sales by
average net accounts receivable. (See page(s) p. 538) |
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| accrual accounting | Accounting system that recognizes expenses
or revenues when they occur regardless of when cash is
exchanged. (See page(s) p. 592) |
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| accumulated conversion factors | Factors used to convert a series
of future cash inflows into their present value equivalent and
that are applicable to cash inflows of equal amounts spread
over equal interval time periods and that can be determined by
computing the sum of the individual single factors used for
each period. (See page(s) p. 403) |
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| acid-test ratio | Measure of immediate debt-paying ability;
calculated by dividing very liquid assets (cash, receivables,
and marketable securities) by current liabilities. (See page(s) p. 538) |
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| activities | The actions taken by an organization to accomplish its
mission. (See page(s) pp. 18, 233) |
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| activity base | Factor that causes changes in variable cost; is
usually some measure of volume when used to define cost
behavior. (See page(s) p. 58) |
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| activity-based cost drivers | Measures of the use and consumption
of activities such as number of setups, percentage of use, and
pounds of material delivered; used as allocation bases, the
measures can improve the accuracy of allocations in technical
and automated business environments in which overhead is no
longer driven by volume. (See page(s) p. 231) |
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| activity-based costing (ABC) | A two-stage allocation process that
employs a variety of cost drivers. In the first stage, costs
associated with specific business activities are allocated or
assigned to activity cost pools. The second stage involves
allocating these pooled costs to designated cost objects through
the use of cost drivers. The cost drivers chosen for each cost
pool are drivers that measure the demand placed on that cost
pool by the cost object. (See page(s) p. 233) |
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| activity-based management (ABM) | Management of the
activities of an organization to add the greatest value by
developing products that satisfy the needs of that
organization’s customers. (See page(s) p. 19) |
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| activity centers | Cost centers organized around operating
activities that have similar characteristics; reduce the costs of
record keeping by pooling indirect costs in a manner that
enables allocations through the use of a common cost driver. (See page(s) p. 233) |
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| allocation | Process of dividing a total cost into parts and
apportioning the parts among the relevant cost objects. (See page(s) p. 186) |
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| allocation base | Cost driver that constitutes the basis for the
allocation process. (See page(s) p. 187) |
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| allocation rate | Factor used to allocate or assign costs to a cost
object; determined by taking the total cost to be allocated and
dividing it by the appropriate cost driver. (See page(s) p. 187) |
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| annuity | Equal series of cash flows received over equal intervals
of time at a constant rate of return. (See page(s) p. 403) |
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| applied overhead | Amount of overhead costs assigned during the
period to work in process using the predetermined overhead
rate. (See page(s) p. 445) |
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| appraisal costs | Costs incurred to identify nonconforming
products that were not avoided via the prevention cost
expenditures. (See page(s) p. 242) |
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| average cost | The total cost of making products divided by the
total number of products made. (See page(s) p. 7) |
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| avoidable costs | Future costs that can be avoided by taking a
specified course of action. To be avoidable in a decisionmaking
context, costs must differ among the alternatives. For
example, if the cost of material used to make two different
products is the same for both products, that cost could not be
avoided by choosing to produce one product over the other.
Therefore, the material’s cost would not be an avoidable cost. (See page(s) p. 137) |
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| batch-level activities | Activities (e.g., material handling,
production setups) related to the production of groups of
products, the cost of which is fixed regardless of the number of
units produced; best allocated using cost drivers that measure
activity consumption. (See page(s) p. 236) |
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| batch-level costs | The costs associated with producing a batch of
products. For example, the cost of setting up machinery to
produce 1,000 products is a batch-level cost. The classification
of batch-level costs is context sensitive. Postage for one
product would be classified as a unit-level cost. In contrast,
postage for a large number of products delivered in a single
shipment would be classified as a batch-level cost. (See page(s) p. 138) |
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| benchmarking | Identifying the best practices used by world-class
competitors. (See page(s) p. 18) |
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| best practices | Practices used by world-class companies. (See page(s) p. 18) |
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| book value per share | Measure of a share of common stock;
calculated by dividing stockholders’ equity less preferred
rights by the number of common shares outstanding. (See page(s) p. 545) |
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| bottleneck | A constraint limiting the capacity of a company to
produce or sell its products. An example is a piece of
equipment that cannot produce enough component parts to
keep employees in the assembly department busy. (See page(s) p. 152) |
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| break-even point | Point where total revenue equals total cost; can
be expressed in units or sales dollars. (See page(s) p. 96) |
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| budget committee | Group of individuals responsible for
coordinating budgeting activities, normally consisting of
upper-level managers including the president; vice presidents
of marketing, production, purchasing, and finance; and the
controller. |
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| budgeting | Form of planning that formalizes a company’s goals
and objectives in financial terms. (See page(s) p. 273) |
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| budget slack | Difference between inflated and realistic standards. (See page(s) p. 319) |
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| by-products | Products that share common inputs with other joint
products but have relatively insignificant market values
relative to the other joint products. (See page(s) p. 198) |
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| capital budget | Budget that describes the company’s plans
regarding investments, new products, or lines of business for
the coming year; is used as input to prepare many of the
operating budgets and becomes a formal part of the master
budget. (See page(s) p. 277) |
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| capital budgeting | Financial planning activities that cover the
intermediate range of time such as whether to buy or lease
equipment, whether to purchase a particular investment, or
whether to increase operating expenses to stimulate sales. (See page(s) p. 274) |
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| capital investments | Expenditures for the purchase of operational
assets that involve a long-term commitment of funds that can
be critically important to the company’s ultimate success;
normally recovered through the use of the assets. (See page(s) p. 400) |
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| cash budget | A budget that focuses on cash receipts and payments
that are expected to occur in the future. (See page(s) p. 283) |
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| cash inflows | Sources of cash. (See page(s) p. 589) |
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| cash outflows | Uses of cash. (See page(s) p. 589) |
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| certified suppliers | Suppliers who have gained the confidence of
the buyer by providing quality goods and services at desirable
prices and usually in accordance with strict delivery
specifications; frequently provide the buyer with preferred
customer status in exchange for guaranteed purchase quantities
and prompt payment schedules. (See page(s) p. 145) |
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| companywide allocation rate | Use of direct labor hours or some
other measure of volume to allocate all overhead cost to the
company’s products or other cost objects. (See page(s) p. 230) |
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| constraints | Factors that limit a business’s ability to satisfy the
demand for its products. (See page(s) p. 152) |
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| continuous improvement | Total quality management (TQM)
feature that refers to an ongoing process through which
employees learn to eliminate waste, reduce response time,
minimize defects, and simplify the design and delivery of
products and services to customers. (See page(s) p. 18) |
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| contribution margin | Difference between a company’s sales
revenue and total variable cost; represents the amount available
to cover fixed cost and thereafter to provide a profit. (See page(s) p. 55) |
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| contribution margin per unit | The contribution margin per unit is
equal to the sales price per unit minus the variable cost per
unit. (See page(s) p. 96) |
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| contribution margin ratio | Result of dividing the contribution
margin per unit by the sales price; can be used in cost-volumeprofit
analysis to determine the amount of the break-even sales
volume expressed in dollars or to determine the dollar level of
sales required to attain a desired profit. (See page(s) p. 108) |
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| controllability concept | The practice that evaluates a manager
only on the revenue and costs under his or her direct control. (See page(s) p. 363) |
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| cost | Amount of resources used to acquire an asset or to produce
revenue. (See page(s) p. 183) |
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| cost accumulation | Process of determining the cost of a particular
object by accumulating many individual costs into a single
total cost. (See page(s) p. 184) |
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| cost allocation | Process of dividing a total cost into parts and
assigning the parts to relevant objects. (See page(s) pp. 12, 185) |
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| cost averaging | Method to determine the average cost per unit of
a product or service by dividing the total cost by the activity
base used in defining the cost; often is more relevant to
decision making than actual costs. Pricing, performance
evaluation, and control depend most often on average costs. (See page(s) p. 59) |
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| cost-based transfer price | Transfer price based on the historical or
standard cost incurred by the supplying segment. (See page(s) p. 374) |
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| cost behavior | How a cost reacts (goes up, down, or remains
the same) relative to changes in some measure of activity
(e.g., the behavior pattern of the cost of raw materials is to
increase as the number of units of product made increases). (See page(s) p. 57) |
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| cost center | Type of responsibility center which incurs costs but
does not generate revenue. (See page(s) p. 361) |
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| cost driver | Any factor, usually some measure of activity, that
causes cost to be incurred, sometimes referred to as activity
base
or allocation base. Examples are labor hours, machine
hours, or some other measure of activity whose change causes
corresponding changes in the cost object. (See page(s) p. 184) |
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| cost objects | Objects for which managers need to know the cost;
can be products, processes, departments, services, activities,
and so on. (See page(s) p. 183) |
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| cost of capital | Return paid to investors and creditors for the use
of their assets (capital); usually represents a company’s
minimum rate of return. (See page(s) p. 401) |
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| cost per equivalent unit | Unit cost of product determined by
dividing total production costs by the number of equivalent
whole units. It is used to allocate product costs between
processing departments (compute ending inventory and the
amount of costs transferred to the subsequent department). (See page(s) p. 498) |
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| cost per unit of input | Cost of one unit of material, labor, or
overhead determined by multiplying the price paid for one unit
of material, labor or overhead input by the usage of input for
one unit of material, labor or overhead. |
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| cost-plus pricing | Pricing strategy that sets the price at cost plus a
markup equal to a percentage of the cost. (See page(s) pp. 6, 96) |
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| cost pool | Many individual costs that have been accumulated into
a single total for the purposes of allocation. (See page(s) p. 196) |
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| cost structure | Company’s cost mix (relative proportion of
variable and fixed costs to total cost). When sales change, the
size of the corresponding change in net income is directly
related to the company’s cost structure. Companies with a
large percentage of fixed cost to variable costs have more
fluctuation in net income with changes in sales. (See page(s) p. 53) |
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| cost tracing | Relating specific costs to the objects that cause their
incurrence. (See page(s) p. 185) |
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| cost-volume-profit (CVP) analysis | Analysis that shows the
interrelationships among sales prices, volume, fixed, and
variable costs; an important tool in determining the break-even
point or the most profitable combination of these variables. (See page(s) p. 96) |
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| current ratio | Measure of liquidity; calculated by dividing current
assets by current liabilities. (See page(s) p. 537) |
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| decentralization | Practice of delegating authority and
responsibility for the operation of business segments. (See page(s) p. 360) |
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| deferral transactions | Accounting transactions in which cash
payments or receipts occur before the associated expense or
revenue is recognized. (See page(s) p. 594) |
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| differential costs | Costs that differ among alternative business
opportunities and are usually relevant information for decision
making. Note, however, that not all are relevant. For example,
although depreciation may differ between the alternatives, it is
not avoidable because it is a sunk cost and therefore not
relevant for decision making. |
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| direct cost | Cost that is easily traceable to a cost object and for
which the sacrifice to trace is small in relation to the
information benefits attained. (See page(s) p. 185) |
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| direct labor | Wages paid to production workers whose efforts can
be easily and conveniently traced to products. (See page(s) p. 9) |
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| direct method | (1) Allocation method that allocates service center
costs directly to operating department cost pools. (2) Method
of preparing the statement of cash flows that reports the total
cash receipts and cash payments from each of the major
categories of activities (collections from customers, payments
to suppliers, etc.). (See page(s) pp. 202, 603) |
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| direct raw materials | Costs of raw materials used to make
products that can be easily and conveniently traced to those
products. (See page(s) p. 9) |
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| dividend yield | Ratio for comparing stock dividends paid in
relation to the market price; calculated as dividends per share
divided by market price per share. (See page(s) p. 546) |
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| downstream costs | Costs, such as delivery costs and sales
commissions, incurred after the manufacturing process is
complete. (See page(s) pp. 17, 241) |
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| earnings per share | Measure of the value of a share of common
stock in terms of company earnings; calculated as net income
available to common stockholders divided by the average
number of outstanding common shares. (See page(s) p. 545) |
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| economies of scale | Concept by which the unit cost of production
can be reduced by taking advantage of opportunities that
become available when an operation’s size is increased.
Increased size usually results in an increased volume of
activity that drives the per unit fixed cost down, resulting in a
lower total cost of production. |
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| efficient market hypothesis | The proposition that creditors and
investors look to the substance of business events regardless of
how those events are reported in financial reports. |
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| equation method | Cost-volume-profit analysis technique that uses
a basic mathematical relationship among sales, variable costs,
fixed costs, and desired net income before taxes and provides a
solution in terms of units. (See page(s) p. 109) |
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| equipment replacement decisions | Decisions regarding whether
existing equipment should be replaced with newer equipment
based on identification and comparison of the avoidable costs
of the old and new equipment to determine which equipment is
more profitable to operate. (See page(s) p. 149) |
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| equivalent whole units | Result of expressing partially completed
goods in an equivalent number of fully completed goods. (See page(s) p. 498) |
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| expense transactions | Transactions completed in the process of
operating a business that decrease assets or increase liabilities. (See page(s) p. 592) |
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| external failure costs | Costs incurred when defective goods are
delivered to customers. (See page(s) p. 242) |
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| facility-level activities | Activities (e.g., paying insurance on the
facility, providing plant maintenance, and paying taxes)
performed for the benefit of the production process as a whole
and whose allocation is arbitrary. (See page(s) p. 237) |
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| facility-level costs | Costs incurred on behalf of the whole
company or a segment of the company; not related to any
specific product, batch, or unit of production or service and
unavoidable unless the entire company or segment is
eliminated. (See page(s) p. 138) |
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| failure costs | Costs incurred from the actual occurrence of
nonconforming events. (See page(s) p. 242) |
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| favorable variance | Variance that occurs when actual costs are
less than standard costs or when actual sales are higher than
standard sales. (See page(s) p. 315) |
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| financial accounting | Field of accounting designed to meet
the information needs of external users of business
information (creditors, investors, governmental agencies,
financial analysts, etc.); its objective is to classify and
record business events and transactions to facilitate the
production of external financial reports (income statement,
balance sheet, statement of cash flows, and statement of
changes in equity). (See page(s) p. 4) |
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| Financial Accounting Standards Board (FASB) | Private,
independent board established by the accounting profession
that has been delegated the authority by the SEC to establish
most of the accounting rules and regulations for public
financial reporting. (See page(s) p. 5) |
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| financial statement budgets (pro forma statements) | Projected
financial statements found in the master budget that are based
on information contained in the operating budgets. |
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| financing activities | Cash inflows and outflows from transactions
with investors and creditors (except interest). These cash flows
include cash receipts from the issue of stock, borrowing
activities, and cash disbursements associated with dividends. (See page(s) pp. 23, 590) |
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| finished goods | End result of the manufacturing process measured
by the accumulated cost of raw materials, labor, and overhead. (See page(s) p. 6) |
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| Finished Goods Inventory | Asset account used to accumulate
the product costs (direct materials, direct labor, and
overhead) associated with completed products that have not
yet been sold. (See page(s) p. 440) |
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| first-in, first-out (FIFO) method | Method used to determine
equivalent units when accuracy is deemed to be important;
accounts for the degree of completion of both beginning and
ending inventories but is more complicated than the weightedaverage
method. (See page(s) p. 499) |
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| fixed cost | Cost that in total remains constant when activity
volume changes; varies per unit inversely with changes in the
volume of activity. (See page(s) p. 50) |
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| flexible budgets | Budgets that show expected revenues and costs
at a variety of different activity levels. (See page(s) p. 314) |
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| flexible budget variances | Differences between budgets based on
standard amounts at the actual level of activity and actual
results; caused by differences in standard and actual unit cost
since the volume of activity is the same. (See page(s) p. 318) |
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| general, selling, and administrative costs | All costs not
associated with obtaining or manufacturing a product; in
practice are sometimes referred to as period costs because they
are normally expensed in the period in which the economic
sacrifice is incurred. (See page(s) p. 11) |
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| generally accepted accounting principles (GAAP) | Rules and
regulations that accountants agree to follow when preparing
financial reports for public distribution. (See page(s) p. 5) |
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| high-low method | Method of estimating the fixed and variable
components of a mixed cost; determines the variable cost per
unit by dividing the difference between the total cost of the
high and low points by the difference in the corresponding
high and low volumes. The fixed cost component is
determined by subtracting the variable cost from the total cost
at either the high or low volume. (See page(s) p. 61) |
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| horizontal analysis | Analysis technique that compares amounts of
the same item over several time periods. (See page(s) p. 533) |
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| hybrid cost systems | Cost system that blends some of the features
of a job-order costing system with some of the features of a
process cost system. (See page(s) p. 486) |
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| ideal standard | Highest level of efficiency attainable, based on all
input factors interacting perfectly under ideal or optimum
conditions. (See page(s) p. 321) |
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| incremental revenue | Additional cash inflows from operations
generated by using an additional capital asset. (See page(s) p. 407) |
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| indirect cost | Cost that cannot be easily traced to a cost object and
for which the economic sacrifice to trace is not worth the
informational benefits. (See page(s) pp. 11, 185) |
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| indirect method | Method of preparing the statement of cash flows
that uses the net income from the income statement as a
starting point for reporting cash flow from operating activities;
adjustments necessary to convert accrual-based net income to a
cash-equivalent basis are shown in the operating activities
section of the statement of cash flows. (See page(s) p. 603) |
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| information overload | Situation in which presentation of too
much information confuses the user of the information. (See page(s) p. 532) |
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| inputs | The resources (material, labor, and overhead) used to make
products. |
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| interdepartmental service | Service performed by one service
department for the benefit of another service department. (See page(s) p. 203) |
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| internal failure costs | Costs incurred when defects are corrected
before goods reach the customer. (See page(s) p. 242) |
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| internal rate of return | Rate that will produce a present value of
an investment’s future cash inflows that equals cash outflows
required to acquire the investment; alternatively, the rate that
produces in a net present value of zero. (See page(s) p. 406) |
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| inventory holding costs | Costs associated with acquiring and
retaining inventory including cost of storage space; lost, stolen,
or damaged merchandise; insurance; personnel and
management costs; and interest. (See page(s) p. 19) |
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| inventory turnover | Measurement of the volume of sales in
relation to inventory levels; calculated as the cost of goods
sold divided by average inventory. (See page(s) p. 539) |
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| investing activities | Cash inflows and outflows associated with
buying or selling long-term assets Also, cash inflows and
outflows associated with lending activities (loans made to
others—cash outflows or collections of loans made to others—
cash inflows). (See page(s) pp. 23, 590) |
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| investment center | Type of responsibility center for which
revenue, expense and capital investments can be measured. (See page(s) p. 361) |
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| job cost sheet | Document used in a job-order cost system to
accumulate the materials, labor, and overhead costs of a job
through the various stages of production; at job completion,
contains a summary of all costs that were incurred to complete
that job; also known as job-order cost sheet or job record. (See page(s) p. 486) |
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| job-order cost system | System used to determine the costs of
distinct, one-of-a-kind products. Costs are traced to products
that are produced individually (e.g., custom designed building)
or produced in batches (e.g., an order for 100 wedding
invitations). (See page(s) p. 484) |
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| joint costs | Common costs incurred in the process of making two
or more products. (See page(s) p. 196) |
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| joint product | Products derived from joint cost. (See page(s) p. 196) |
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| just in time (JIT) | Inventory flow system that minimizes the
amount of inventory on hand by making inventory available
for customer consumption on demand, therefore eliminating
the need to store inventory. The system reduces explicit
holding costs including financing, warehouse storage,
supervision, theft, damage, and obsolescence. It also
eliminates hidden opportunity costs such as lost revenue due to
the lack of availability of inventory. (See page(s) p. 19) |
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| labor efficiency variance | Variance occurring in a standard cost
accounting system when the actual amount or quantity of direct
labor used differs from the standard amount required. (See page(s) p. 324) |
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| labor rate variance | Variance that occurs when the actual pay rate
differs from the standard pay rate for direct labor. (See page(s) p. 324) |
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| lax standards | Easily attainable goals that can be accomplished
with minimal effort. (See page(s) p. 321) |
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| liquidity ratios | Measures of short-term debt-paying ability. (See page(s) p. 537) |
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| low-ball pricing | Pricing a product below competitors’ price to
lure customers away and then raising the price once customers
depend on the supplier for the product. (See page(s) p. 145) |
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| making the numbers | Expression that indicates that marketing
managers attained the sales volume indicated in the master
budget. (See page(s) p. 316) |
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| management by exception | Use of management resources on
areas that are not performing in accordance with expectations;
a philosophy that directs management to concentrate on areas
with significant variances. (See page(s) pp. 321, 362) |
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| managerial accounting | Field of accounting designed to meet the
information needs of managers and other individuals working
inside the business. It is concerned with information gathering
and reporting that adds value to the business. Managerial
accounting information is not regulated or made available to
the public. (See page(s) p. 4) |
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| manufacturing overhead | Production costs that cannot be traced
directly to products. (See page(s) p. 11) |
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| Manufacturing Overhead account | Temporary account used
during an accounting period to accumulate the actual overhead
costs incurred and the total amount of overhead applied to the
Work in Process account. At the end of the period, a debit
balance in the account implies that overhead has been
underapplied and a credit balance implies that overhead has
been overapplied. The account is closed at year end in an
adjusting entry to the inventory and Cost of Goods Sold
accounts. If the balance is insignificant, it is closed only to
Cost of Goods Sold. (See page(s) p. 445) |
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| margin of safety | Difference between break-even sales and
budgeted sales expressed in units, dollars, or as a percentage;
the amount by which actual sales can fall below budgeted sales
before a loss is incurred. (See page(s) p. 105) |
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| market-based transfer price | Transfer price based on the
external market price less any savings in cost; the closest
approximation to an arm’s-length transaction that segments
can achieve. (See page(s) p. 372) |
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| master budget | Composition of the numerous separate but
interdependent departmental budgets that cover a wide range
of operating and financial factors such as sales, production,
manufacturing expenses, and administrative expenses. (See page(s) p. 276) |
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| material variance | Variance that would affect decision making. (See page(s) p. 322) |
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| materiality | Characteristic that designates the point at which the
knowledge of or lack of information would make a difference
in a decision; can be measured in absolute, percentage,
quantitative, or qualitative terms. (See page(s) p. 533) |
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| materials price variance | Variance that occurs when actual prices
paid for raw materials differ from the standard prices. (See page(s) p. 324) |
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| materials quantity variance | Variance that occurs when the actual
amounts of raw materials used to produce a good differ from
the standard amounts required to produce that good. (See page(s) p. 324) |
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| materials requisition | A form used to request or order the
materials needed to begin a designated job; can be a paper
document or an electronic impulse delivered through a
computer. Materials requisitioned for a job are summarized by
the accounting department on a job cost sheet. (See page(s) p. 486) |
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| minimum rate of return | Minimum amount of profitability
required to persuade a company to accept an investment
opportunity; also known as desired rate of return, required rate of return, hurdle rate, cutoff rate, and discount rate. (See page(s) p. 401) |
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| mixed costs (semivariable costs) | Costs composed of a mixture of
fixed and variable components. (See page(s) p. 61) |
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| most-favored customer status | Arrangement by which a supplier
and customer achieve mutual benefit by providing each other
with favorable treatment that is not extended to other
associates. (See page(s) p. 19) |
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| negotiated transfer price | Transfer price established by
agreement of both the selling and buying segments of the firm. (See page(s) p. 374) |
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| net margin | Profitability measurement that indicates the
percentage of each sales dollar resulting in profit; calculated as
net income divided by net sales. (See page(s) p. 542) |
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| net present value | Evaluation technique that uses a desired rate of
return to discount future cash flows back to their present value
equivalents and then subtracts the cost of the investment from
the present value equivalents to determine the net present
value. A zero or positive net present value (present value of
cash inflows equals or exceeds the present value of cash
outflows) implies that the investment opportunity provides an
acceptable rate of return. (See page(s) p. 406) |
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| noncash investing and financing activities | Business transactions
that do not directly affect cash, such as exchanging stock for
land or purchasing property by using a mortgage; are reported
as both an inflow and outflow in a separate section of the
statement of cash flows. (See page(s) p. 590) |
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| nonvalue-added activities | Tasks undertaken that do not contribute
to a product’s ability to satisfy customer needs. (See page(s) p. 19) |
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| number of days’ sales in inventory | Another way to look at the
inventory turnover by converting the inventory turnover ratio
into a number of days; calculated by dividing 365 by the
inventory turnover ratio. |
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| number of days’ sales in receivables (average collection | Another way to look at the accounts receivable
turnover by converting the turnover ratio into a number of
days; calculated by dividing 365 days by the turnover ratio. |
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| operating activities | Cash inflows and outflows associated with
operating the business. These cash flows normally result from
revenue and expense transactions including interest. (See page(s) pp. 22, 590) |
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| operating budgets | Budgets prepared by different departments
within a company that will become a part of the company’s
master budget; typically include a sales budget, an inventory
purchases budget, a selling and administrative budget, and a
cash budget. (See page(s) p. 276) |
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| operating departments | Departments assigned tasks leading to
the accomplishment of the organization’s objectives. (See page(s) p. 201) |
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| operating leverage | Operating condition in which a percentage
change in revenue produces a proportionately larger
percentage change in net income; measured by dividing the
contribution margin by net income. The higher the proportion
of fixed cost to total costs, the greater the operating leverage. (See page(s) p. 50) |
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| opportunity cost | Cost of lost opportunities such as the failure
to make sales due to an insufficient supply of inventory. (See page(s) pp. 21, 139) |
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| ordinary annuity | Annuity whose cash inflows occur at the end of
each accounting period. (See page(s) p. 404) |
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| outputs | Products that result from processing inputs. |
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| outsourcing | The practice of buying goods and services from
another company rather than producing them internally. (See page(s) p. 143) |
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| overapplied or underapplied overhead | Result of allocating
more or less overhead costs to the Work in Process account
than the amount of the actual overhead costs incurred. |
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| overhead | Costs associated with producing products that cannot be
cost effectively traced to products; includes indirect costs such
as indirect materials, indirect labor, utilities, rent, depreciation
on manufacturing facilities and equipment, and planning,
design, and setup costs related to the manufacture of products. (See page(s) p. 6) |
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| overhead costs | Indirect costs of doing business that cannot be
directly traced to a product, department, or process, such as
depreciation. (See page(s) p. 185) |
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| participative budgeting | Budget technique that allows
subordinates to participate with upper-level managers in
setting budget objectives, thereby encouraging cooperation
and support in the attainment of the company’s goals. (See page(s) p. 276) |
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| payback method | Technique that evaluates investment
opportunities by determining the length of time necessary to
recover the initial net investment through incremental revenue
or cost savings; the shorter the period, the better the
investment opportunity. (See page(s) p. 414) |
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| percentage analysis | Analysis of relationships between two
different items to draw conclusions or make decisions. (See page(s) p. 534) |
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| period costs | General, selling, and administrative costs that are
expensed in the period in which the economic sacrifice is
made. (See page(s) p. 11) |
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| perpetual (continuous) budgeting | Continuous budgeting activity
normally covering a 12-month time span by replacing the
current month’s budget at the end of each month with a new
budget; keeps management constantly involved in the budget
process so that changing conditions are incorporated on a
timely bases. (See page(s) p. 275) |
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| postaudit | Repeat calculation using the techniques originally
employed to analyze an investment project; accomplished with
the use of actual data available at the completion of the
investment project so that the actual results can be compared
with expected results based on estimated data at the beginning
of the project. Its purpose is to provide feedback as to whether
the expected results were actually accomplished in improving
the accuracy of future analysis. (See page(s) p. 417) |
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| practical standard | Level of efficiency in which the ideal
standard has been modified to allow for normal tolerable
inefficiencies. (See page(s) p. 321) |
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| predetermined overhead rate | Rate determined by dividing the
estimated overhead costs for the period by some measure of
estimated total production activity for the period, such as the
number of labor hours or machine hours. The base chosen
should provide some logical measure of overhead use. The rate
is determined before actual costs or activity are known.
Throughout the accounting period, the rate is used to allocate
overhead costs to the Work in Process Inventory account based
on actual production activity. (See page(s) pp. 196, 445) |
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| present value index | Present value of cash inflows divided by the
present value of cash outflows. Higher index numbers indicate
higher rates of return. (See page(s) p. 410) |
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| present value table | Table that consists of a list of factors to use in
converting future values into their present value equivalents;
composed of columns that represent different return rates and
rows that depict different periods of time. (See page(s) p. 402) |
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| prestige pricing | Pricing strategy that sets the price at a premium
(above average markup above cost) under the assumption that
people will pay more for the product because of its prestigious
brand name, media attention, or some other reason that has
piqued the interest of the public. (See page(s) p. 106) |
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| prevention costs | Costs incurred to avoid nonconforming
products. (See page(s) p. 242) |
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| price-earnings ratio | Measurement used to compare the values of
different stocks in terms of earnings; calculated as market price
per share divided by earnings per share. (See page(s) p. 546) |
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| pro forma financial statements | Budgeted financial statements
prepared from the information in the master budget. (See page(s) p. 283) |
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| process cost system | System used to determine the costs of
homogeneous products, such as chemicals, foods or paints,
that distributes costs evenly across total production;
determines an average by dividing the total product costs of
each production department by the number of units of product
made in that department during some designated period of
time. The total costs in the last production department include
all costs incurred in preceding departments so that the unit cost
determined for the last department reflects the final unit cost of
the product. (See page(s) p. 484) |
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| product costs | All costs related to obtaining or manufacturing a
product intended for sale to customers; are accumulated in
inventory accounts and expensed as cost of goods sold at the
point of sale. For a manufacturing company, product costs
include direct materials, direct labor, and manufacturing
overhead. (See page(s) p. 6) |
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| product costing | Classification and accumulation of individual
inputs (materials, labor, and overhead) for determining the cost
of making a good or providing a service. (See page(s) p. 6) |
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| product-level activities | Activities (e.g., inventory holding cost,
engineering developmental costs) that support a specific
product or product line and whose allocation is based on the
extent to which the activities are used in sustaining the product
or product line. (See page(s) p. 236) |
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| product-level costs | Costs incurred to support different kinds of
products or services; can be avoided by the elimination of a
product line or a type of service. (See page(s) p. 138) |
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| profit center | Type of responsibility center for which both
revenues and costs can be indentified. (See page(s) p. 361) |
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| profitability ratios | Measurements of a firm’s ability to generate
earnings. (See page(s) p. 547) |
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| qualitative characteristics | Nonquantifiable features such as
company reputation, welfare of employees, and customer
satisfaction that can be affected by certain decisions. (See page(s) p. 140) |
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| quality | The degree to which actual products or services conform
to their design specifications. (See page(s) p. 242) |
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| quality cost report | An accountant’s report that typically lists the
company’s quality costs and provides a horizontal analysis
showing each item as a percentage of total cost. (See page(s) p. 243) |
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| quantitative characteristics | Numbers in decision making subject
to mathematical manipulation, such as the dollar amounts of
revenues and expenses. (See page(s) p. 140) |
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| quick ratio | Same as acid-test ratio. (See page(s) p. 538) |
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| ratio analysis | Same as percentage analysis. (See page(s) p. 536) |
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| raw materials | Physical commodities (e.g., wood, metal, paint)
used in the manufacturing process. (See page(s) p. 9) |
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| Raw Materials Inventory | Asset account used to accumulate the
costs of materials such as lumber, metals, paints, chemicals
that will be used to make the company’s products. (See page(s) p. 440) |
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| reciprocal method | Allocation method that considers two-way
associations between/among service centers (service centers
provide to as well as receive services from other service
centers); uses simultaneous linear equations, but the resultant
cost distributions are difficult to interpret. (See page(s) p. 205) |
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| reciprocal relationships | Two-way associations in which
departments provide services to and receive services from one
another. (See page(s) p. 205) |
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| recovery of investment | Recovery of the funds used to acquire the
original investment. (See page(s) p. 415) |
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| reengineering | Business practices designed by companies to make
production and delivery systems more competitive in world
markets by eliminating or minimizing waste, errors, and costs. (See page(s) p. 18) |
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| relevant costs | Future-oriented costs that differ between business
alternatives; also known as avoidable costs. (See page(s) p. 137) |
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| relevant information | Decision-making information about costs,
costs savings, or revenues that have these features: (1) futureoriented
information and (2) the information differs between
the alternatives; decision specific (information that is relevant
in one decision may not be relevant in another decision).
Relevant costs are referred to as avoidable costs and relevant
revenues
are referred to as differential revenues. (See page(s) p. 136) |
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| relevant range | Range of activity over which the definitions of
fixed and variable costs apply. (See page(s) p. 58) |
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| residual income | Approach that evaluates managers on their
ability to maximize the dollar value of earnings above some
targeted level of earnings. (See page(s) p. 369) |
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| responsibility accounting | Accounting system in which the
accountability for results is assigned to a segment manager of
the firm based on the amount of control or influence the
manager possesses over those results. (See page(s) p. 360) |
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| responsibility center | Point in an organization where the control
over revenue or expense items is located. (See page(s) p. 361) |
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| responsibility reports | Reports of the performance of various
responsibility centers of the firm with respect to controllable
items; show the variances that result from comparing budgeted
and actual controllable items. (See page(s) p. 361) |
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| retained earnings | Equity account that is the culmination of all
earnings retained in the business since inception (all revenues
minus all expenses—including cost of goods sold—and
distributions for the period added to all past retained earnings). (See page(s) p. 447) |
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| return on assets | The ratio of net income divided by total assets. |
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| return on equity | Measure of the profitability of a firm based on
earnings generated in relation to stockholders’ equity; calculated
as net income divided by stockholders’ equity. (See page(s) p. 544) |
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| return on investment | Measure of profitability based on the asset
base of the firm. It is calculated as net income divided by
average total assets. ROI is a product of net margin and asset
turnover. (See page(s) pp. 365, 544) |
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| revenue transactions | Transactions completed in the process of
operating a business that increase assets or decrease liabilities
by providing services or products. (See page(s) p. 592) |
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| sales volume variance | Difference between sales based on a static
budget (standard sales price times standard level of activity)
and sales based on a flexible budget (standard sales price times
actual level of activity). (See page(s) p. 315) |
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| sales price variance | Difference between actual sales and
expected sales based on the standard sales price per unit times
the actual level of activity. (See page(s) p. 318) |
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| scattergraph method | Method of estimating the variable and
fixed components by which cost data are plotted on a graph
and a regression line is visually drawn through the points so
that the total distance between the data points and the line is
minimized. (See page(s) p. 62) |
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| schedule of cost of goods manufactured and sold | Schedule that
summarizes the flow of manufacturing product costs; its result,
cost of goods sold, is shown as a single line item on the
company’s income statement. (See page(s) p. 452) |
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| Securities and Exchange Commission (SEC) | Government
agency authorized by Congress to establish regulations
regarding public reporting practices; requires companies that
issue securities to the public to file annual audited financial
statements with it. (See page(s) p. 4) |
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| segment | Component part of an organization that is designated as
a reporting entity. (See page(s) p. 146) |
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| sensitivity analysis | Spreadsheet analysis that executes “what-if ”
questions to assess the sensitivity of profits to simultaneous
changes in fixed cost, variable cost, and sales volume. (See page(s) p. 106) |
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| service departments | Departments such as quality control, repair
and maintenance, personnel, and accounting that provide
support to the operating departments. (See page(s) p. 201) |
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| single-payment (lump-sum) | A one-time receipt of cash which
can be converted to its present value using a conversion factor. (See page(s) p. 402) |
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| solvency ratios | Measures of a firm’s long-term debt-paying
ability. (See page(s) p. 540) |
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| special order decisions | Decisions of whether to accept orders
from nonregular customers who want to buy goods or services
significantly below the normal selling price. If the order’s
differential revenues exceed its avoidable costs, the order
should be accepted. Qualitative features such as the order’s
effect on the existing customer base if accepted must also be
considered. (See page(s) p. 141) |
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| spending variance | Difference between actual fixed overhead
costs and budgeted fixed overhead costs. (See page(s) p. 328) |
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| split-off point | Point in the production process where products
become separate and identifiable. (See page(s) p. 196) |
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| standards | Per unit price or costs that “should be” based on a
certain set of anticipated circumstances; per unit cost
standards are composed of price and quantity standards that
together provide the per unit cost standard. (See page(s) p. 320) |
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| start-up (setup) costs | The costs associated with the activities of
changing machinery, the production configuration, inspection,
etc., to prepare for making a new product or a batch of a
product. (See page(s) p. 232) |
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| statement of cash flows | A financial statement that describes the
sources and uses of cash that occurred during an accounting
period. (See page(s) p. 22) |
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| static budgets | Budgets such as the master budget based solely on
the level of planned activity; remain constant even when
volume of activity changes. (See page(s) p. 314) |
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| step method | Two-step allocation method that considers one-way
interdepartmental service center relationships by allocating
costs from service centers to service centers as well as from
service centers to operating departments; does not consider
reciprocal relationships between service centers. (See page(s) p. 203) |
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| strategic cost management | New management techniques that
are designed to more accurately measure and control costs.
The techniques have been implemented as a response to
today’s complex automated business environment. These
new strategies include efforts to eliminate nonvalue-added
activities, more efficient designs for the manufacturing
process, and new ways to trace overhead costs to cost objects. (See page(s) p. 241) |
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| strategic planning | Planning activities associated with long-range
decisions such as defining the scope of the business,
determining which products to develop, deciding whether to
discontinue a business segment, and determining which market
niche would be most profitable. (See page(s) p. 274) |
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| suboptimization | Situation in which managers act in their own
self-interests even though the organization as a whole suffers. (See page(s) p. 369) |
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| sunk costs | Costs that have been incurred in past transactions and
therefore are not relevant for decision making. In an equipment
replacement decision, the cost of the old machine presently in
use is a sunk cost and is not avoidable because it has already
been incurred. (See page(s) p. 136) |
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| T-account method | Method of determining net cash flows by
analyzing beginning and ending balances on the balance sheet
and inferring the period’s transactions from the income
statement. (See page(s) p. 592) |
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| target pricing (target costing) | Pricing strategy that begins with
the determination of a price at which a product will sell and
then focuses on the development of that product with a cost
structure that will satisfy market demands. (See page(s) p. 99) |
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| theory of constraints (TOC) | Practice used by many businesses
to increase profitability by managing bottlenecks or
constrained resources by identifying the bottlenecks restricting
the operations of the business and then opening them by
relaxing the constraints. (See page(s) p. 153) |
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| time value of money | Concept that recognizes the fact that the
present value of an opportunity to receive one dollar in the
future is less than one dollar because of interest, risk, and
inflation factors. (See page(s) p. 401) |
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| total quality management (TQM) | Management philosophy that
includes: (1) a continuous systematic problem-solving
philosophy that engages personnel at all levels of the
organization to eliminate waste, defects, and nonvalue-added
activities; and (2) to manage quality costs in a manner that
leads to the highest level of customer satisfaction. (See page(s) pp. 18, 243) |
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| transferred-in costs | Costs transferred from one department to the
next; combined with the materials, labor, and overhead costs
incurred in the department so that when goods are complete,
the total product cost of all departments is transferred to the
Finished Goods Inventory account. (See page(s) p. 486) |
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| transfer price | Price at which products or services are transferred
between divisions or other subunits of an organization. (See page(s) p. 372) |
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| |
| trend analysis | Study of the performance of a business over a
period of time. (See page(s) p. 533) |
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| |
| |
| turnover of assets | Measure of sales in relation to assets;
calculated as net sales divided by total assets. |
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| |
| unadjusted rate of return | Measure of profitability computed
by dividing the average incremental increase in annual net
income by the average cost of the original investment (original
cost _ 2). (See page(s) p. 415) |
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| |
| unfavorable variance | Variance that occurs when actual costs
exceed standard costs or when actual sales are less than
standard sales. (See page(s) p. 315) |
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| |
| unit-level activities | Activities that occur each time a unit of
product is made; the costs associated with these activities
exhibit a variable cost behavior pattern. (See page(s) p. 235) |
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| |
| unit-level costs | Costs incurred each time a company makes a
single product or performs a single service and that can be
avoided by eliminating a unit of product or service. Likewise,
unit-level costs increase with each additional product produced
or service provided. (See page(s) p. 137) |
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| |
| upstream costs | Costs incurred before the manufacturing
process begins, for example, research and development
costs. (See page(s) pp. 17, 241) |
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| |
| value-added activity | Any unit of work that contributes to a
product’s ability to satisfy customer needs. (See page(s) p. 19) |
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| |
| value-added principle | The benefits attained (value added) from
the process should exceed the cost of the process. (See page(s) p. 5) |
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| |
| value chain | Linked sequence of activities that create value for the
customer. (See page(s) p. 19) |
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| |
| variable cost | Cost that in total changes in direct proportion to
changes in volume of activity; remains constant per unit when
volume of activity changes. (See page(s) p. 49) |
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| |
| |
| variable costing | Product costing system that capitalizes only
variable cost in inventory; its income statement subtracts
variable costs from revenue to determine contribution margin.
Fixed costs, including product cost, are subtracted from the
contribution margin to determine net income. In this format the
amount of net income is not affected by the volume of
production. (See page(s) p. 454) |
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| variances | Differences between standard and actual amounts. (See page(s) p. 315) |
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| |
| vertical analysis | Analysis technique that compares items on
financial statements to significant totals. (See page(s) p. 535) |
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| |
| vertical integration | Attainment of control over the entire
spectrum of business activity from production to sales; as an
example a grocery store that owns farms. (See page(s) p. 144) |
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| |
| |
| visual fit line | Line drawn by visual inspection to minimize the
total distance between the data points and the line; used to
estimate fixed and variable cost. (See page(s) p. 62) |
| |
| |
| |
| volume-based cost drivers | Measures of volume such as labor
hours, machine hours, or amounts of materials that have a
strong correlation with unit-level overhead cost and that make
appropriate allocation bases for the allocation of unit-level
overhead costs. (See page(s) p. 231) |
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| |
| volume variance | Difference between the budgeted fixed cost and
the amount of fixed costs allocated to production. (See page(s) p. 328) |
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| |
| voluntary costs | Prevention and appraisal costs that are a function
of managerial discretion. (See page(s) p. 242) |
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| |
| weighted average method | Method often used in a process cost
system for determining equivalent units; ignores the state of
completion of items in beginning inventory and assumes that
items in beginning inventory are complete. (See page(s) p. 498) |
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| work ticket | Mechanism (paper or electronic) used to accumulate
the time spent on a job by each employee; sent to the
accounting department where wage rates are recorded and
labor costs are determined. The amount of labor costs for each
ticket is summarized on the appropriate job-order cost sheet;
sometimes called a time card. (See page(s) p. 487) |
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| working capital | Current assets minus current liabilities. (See page(s) pp. 407, 537) |
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| working capital ratio | Another term for the current ratio;
calculated by dividing current assets by current liabilities. (See page(s) p. 537) |
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| Work in Process Inventory | Asset account used to accumulate all
product costs (direct materials, direct labor, and overhead)
associated with incomplete products in production. (See page(s) p. 440) |