ActivitiesMeasures an organization undertakes to accomplish its mission.

Activity-based management (ABM)Managing organization activities to add the greatest value by developing products that satisfy the needs of the organization’s customers.

Average cost(per unit) The total cost of making products divided by the total number of products made.

BenchmarkingIdentifying best practices used by world-class competitors in a given industry.

Best practicesIdentifiable procedures used by world-class companies.

Continuous improvementAn 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; a feature of total quality management (TQM).

Cost allocationProcess of dividing a total cost into parts and assigning the parts to relevant objects.

Cost-plus pricingStrategy that sets the selling price at cost plus a markup equal to a percentage of the cost.

Direct laborWages paid to production workers whose efforts can be easily and conveniently traced to products.

Direct raw materialsCosts of raw materials used to make products that can be easily and conveniently traced to those products.

Downstream costsCosts incurred after the manufacturing process is complete, such as delivery costs and sales commissions.

Financial accountingBranch of accounting focused on the business information needs of external users (creditors, investors, governmental agencies, financial analysts, etc.); its objective is to classify and record business events and transactions to produce external financial reports (income statement, balance sheet, statement of cash flows, and statement of changes in equity).

Financial Accounting Standards Board (FASB)Private, independent standard-setting body 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.

Financing activitiesCash inflows and outflows from transactions with investors and creditors (except interest), including cash receipts from issuing stock, borrowing activities, and cash disbursements to pay dividends.

Finished goodsCompleted products resulting from the manufacturing process; measured by the accumulated cost of raw materials, labor, and overhead.

General, selling, and administrative costsAll costs not associated with obtaining or manufacturing a product; sometimes called period costs because they are normally expensed in the period in which the economic sacrifice is incurred.

Generally accepted accounting principles (GAAP)Rules and practices that accountants agree to follow in financial reports prepared for public distribution.

Indirect costsTechnique in which upper-level managers involve subordinates in setting budget objectives, thereby encouraging employee cooperation and support in attaining the company’s goals.

Inventory holding costsCosts associated with acquiring and retaining inventory including cost of storage space; lost, stolen, or damaged merchandise; insurance; personnel and management costs; and interest.

Investing activitiesCash inflows and outflows associated with buying or selling long-term assets and cash inflows and outflows associated with lending activities (loans to others—cash outflows; collecting loans to others—cash inflows).

Just in time (JIT)Inventory management system that minimizes the amount of inventory on hand by avoiding inventory acquisition until products are demanded by customers, therefore eliminating the need to store inventory. The system reduces inventory holding costs including financing, warehouse storage, supervision, theft, damage, and obsolescence. It can also eliminate opportunity costs such as lost revenue due to the lack of availability of inventory.

Managerial accountingBranch of accounting focused on the information needs of managers and others working within the business. Its objective is to gather and report information that adds value to the business. Managerial accounting information is not regulated or reported to the public.

Manufacturing overheadProduction costs that cannot be easily or economically traced directly to products.

Nonvalue-added activitiesTasks undertaken that do not contribute to a product’s ability to satisfy customer needs.

Operating activitiesCash inflows from and outflows for routine, everyday business operations, normally resulting from revenue and expense transactions including interest.

Opportunity costCost of lost opportunities such as revenue forgone because of insufficient inventory.

OverheadMethod of reporting cash flows from operating activities on the statement of cash flows that starts with the net income from the income statement, followed by adjustments necessary to convert accrual-based net income to a cash-basis equivalent.

Period costsRules and practices that accountants agree to follow in financial reports prepared for public distribution.

Product costsMaintaining a budget that always reflects plans for the coming 12 months by adding a new monthly budget to the end as the current month’s expires; keeps management constantly involved in the budget process to allow timely recognition of changing conditions.

Product costingClassifying and accumulating the costs of individual inputs (materials, labor, and overhead) to determine the cost of making a product or providing a service.

Productive assetsAssets used to operate the business. May also be called long-term assets.

Raw materialsPhysical commodities (e.g., wood, metal, paint) transformed into products through the manufacturing process.

ReengineeringBusiness practices companies design to improve competitiveness in world markets by eliminating or minimizing waste, errors, and costs in production and delivery systems.

Sarbanes-Oxley Act of 2002A federal law that regulates corporate governance.

Securities and Exchange Commission (SEC)Government agency authorized by Congress to regulate financial reporting practices of public companies; requires companies that issue securities to the public to file audited financial statements with the government annually.

Statement of cash flowsThe financial statement that classifies and reports a company’s sources and uses of cash during an accounting period.

Total quality management (TQM)Management strategy that focuses on (1) continuous systematic problem-solving by personnel at all levels of the organization to eliminate waste, defects, and nonvalue-added activities; and (2) managing quality costs in a manner that leads to the highest level of customer satisfaction.

Upstream costsCosts incurred before beginning the manufacturing process, such as research and development costs.

Value-added activityAny part of business operations that contributes to a product’s ability to satisfy customer needs.

Value-added principleThe benefits attained (value added) from a process should exceed the cost of the process.

Value chainLinked sequence of activities that create value for the customer.