Controllership and Financial Management Terms- Glossary
absorption costing. A costing method that treats all manufacturing cost (direct materials, direct labor, variable overhead, and fixed overhead) as product costs. It is also referred to as full costing.
accept or reject decision. Decision resulting from a relevant cost analysis concerning whether to accept or reject a special order.
accounts payable turnover ratio. A liquidity measure that shows the number of times on average that accounts payable are paid during the period; calculated by dividing net credit purchases by average accounts payable during the period.
accounts receivable turnover ratio. A liquidity measure that shows the number of times on average that accounts receivable are collected during the period; calculated by dividing net credit sales by average accounts receivable during the period.
action analysis report. A report detailing the costs that have been assigned to a cost object, such as a product or a customer; it also shows how difficult it would be to adjust the cost if there were a change in activity.
activity. An event that causes the consumption of overhead resources within an organization.
activity cost pool. A “bucket” in which costs that relate to a single activity measure are accumulated within an activity-based costing system.
activity measure. An allocation basis within an activity-based costing system which, under ideal conditions, measures the amount of activity that drives the costs in an activity cost pool.
activity-based costing (ABC). A costing method that focuses on individual activities as primary cost objects and uses the costs of these activities as the basis for assigning costs to other cost objects such as products and services.
activity-based management (ABM). A management approach that focuses on managing activities as a way of eliminating waste, reducing delays, and minimizing defects.
administrative cost. Any executive, organizational, and clerical cost associated with the general management of an organization.
amortization. The process of allocating the cost of an intangible asset over its estimated useful life.
asset turnover rate. The sales divided by the average operating assets figure. It represents the amount of sales generated from each dollar invested in operating assets by an investment center.
average age of inventory. The number of days on average that a company holds inventory before it is sold; calculated by dividing 365 days by the inventory turnover ratio.
average collection period. The number of days on average that an account receivable remains outstanding; calculated by dividing 365 days by the accounts receivable turnover ratio.
average payment period. The number of days on average that an account payable remains unpaid; calculated by dividing 365 days by the accounts payable turnover ratio.
balanced scorecard. An integrated set of financial, customer, internal business processes, and learning and growth performance measures that is derived from and supports an organization’s strategy.
benchmarking. A study of organizations considered to be among the best in performing a particular task. Involves establishment, through data gathering, of targets and comparators, through whose use relative levels of performance can be identified.
bottleneck. Any machine or other part of a process that limits the total output of an entire system.
break-even point. The level of sales, in units or dollars, where profit is zero. It can also be defined as the point where total sales equals total fixed and variable costs, or the point where total contribution margin equals total fixed costs.
budget. A detailed plan for the future acquisition and use of financial and other resources over a specified period of time, usually expressed in formal quantitative terms.
business process. The series of steps followed when carrying out some task in a business.
capital budgeting. The process of planning significant outlays on projects that have long-term implications, such as the acquisition of new property and equipment or the introduction of a new product line.
capital lease. A long-term agreement that allows one party (the lessee) to use the asset of another party (the lessor) in an arrangement accounted for like a purchase.
cash budget. A detailed plan showing the primary sources and uses of cash resources over a specific time period.
cash debt coverage ratio. A measure of solvency that can be calculated by dividing cash provided by operating activities by average total assets.
change management. The process of coordinating a structured period of transition from one situation to another in order to achieve lasting change within an organization. It can be of varying scope, from continuous improvement to radical and substantial change involving organizational strategy.
chief financial officer. Top management team member responsible for providing timely and relevant data to support planning and control activities and for preparing financial statements for external users.
committed fixed cost. Any fixed cost that is considered to be difficult to adjust because it relates to the investment in facilities, equipment, or the basic organizational structure of a firm
common cost. Costs that are incurred to support a number of costing objects but that cannot be traced to any one of those costing objects individually.
constraint. Any limitation under which an organization must operate, such as limited available raw materials or machine time, that restricts the organization’s ability to satisfy demand.
contribution margin. The difference between total sales and total variable cost, or the difference between unit selling price and unit variable cost. It represents the amount contributed to covering fixed costs and providing a profit to the organization.
contribution margin ratio. The ratio of total contribution margin to total sales, or the ratio of unit contribution margin to unit selling price. It is used in cost-volume-profit analysis.
control. The process of establishing procedures and then obtaining feedback in order to ensure that all parts of the organization are functioning effectively and moving toward overall company goals.
controller. The manager in charge of the organization’s accounting department.
controlling. Ensuring that a plan is actually implemented and appropriately modified as circumstances change.
conversion cost. Costs of converting raw materials into finished goods. It is the sum of direct labor costs plus manufacturing overhead costs.
core competencies. A bundle of skills and technologies that enable a company to provide a particular benefit to customers that gives it competitive differentiation.
corporate governance. The system by which organizations are directed and controlled. Its structure specifies the distribution of rights and responsibilities among different participants in the organization and spells out the rules and procedures for making decisions on corporate affairs. The result is the structure through which corporate objectives are set and through which the means of obtaining those objectives and monitoring performance are achieved.
cost behavior. How a cost reacts or responds to changes in activity levels. Costs may be fixed, variable, or mixed.
cost center. A business segment whose manager has control over costs, but not over revenues or the use of invested funds.
cost driver. A factor that causes overhead costs, such as machine-hours, labor hours, or computer time.
cost management. The application of managerial accounting concepts, methods of data collection, data analysis, and data presentation so that relevant information can be provided for purposes of planning, monitoring, and controlling costs.
cost object. Anything for which cost data are desired, such as products, product lines, customers, jobs, or organizational subunits.
cost of capital. The average rate of return that a corporation must pay to its long-term creditors and shareholders for the use of their funds.
cost of goods manufactured. Manufacturing costs associated with goods that are completed and become available for sale during the period.
current cash debt coverage ratio. A measure of liquidity that can be calculated by dividing cash provided by operating activities by average current liabilities.
current ratio. A measure commonly used to evaluate a company’s liquidity and short-term debt- paying ability that can be calculated by dividing total current assets by total current liabilities.
customer relationship management. A combination of customer information systems, personalization systems, content management systems, and campaign management systems.
debt to asset ratio. A measure of solvency that shows the percentage of total assets financed with borrowed funds; calculated by dividing total liabilities by total assets.
decentralization. The process of delegating decision-making authority throughout an organization by empowering managers at various operating levels within the organization to make key decisions relating to their area of responsibility.
depletion. The process of allocating the cost of a natural resource over its estimated useful life.
depreciation. The process of allocating the cost of an item of property, plant, and equipment over its estimated useful life.
differential cost. Any difference in cost between two alternative courses of action under consideration. Also referred to as relevant cost.
differential revenue. Any difference in revenue between two alternative courses of action under consideration. Also referred to as relevant revenue.
direct allocation method. A method of allocating service department costs to operating departments that allocates all service department costs directly to those operating departments without recognizing any services provided to other service departments.
direct cost. Any cost that can be easily and conveniently traced to a specified cost object.
direct labor. Any manufacturing labor costs that can be conveniently and easily traced to individual units of product.
direct labor budget. A detailed plan that shows the labor requirements needed to meet projected production requirements over a specified period of time.
direct materials. Any manufacturing materials costs that can be conveniently and easily traced to individual units of product.
direct materials budget. A detailed plan that shows the amount of raw materials that must be purchased during a specified period of time in order to meet production needs and provide for the desired level of ending raw materials inventory.
directing. Mobilizing employees to carryout plans and perform routine operations.
discretionary fixed cost. Any fixed cost that is considered to be relatively easy to adjust because it arises from annual decisions by management to spend in certain fixed cost areas such as advertising, employee development, or research and development.
duration driver. In activity-based costing, a measure of the amount of time required to perform an activity.
earnings per share (EPS). A measure of the net income earned on each share of common stock outstanding; calculated by dividing net income minus preferred stock dividends by the average number of common shares outstanding during the year.
economic value added (EVA). A concept similar to residual income used for performance evaluation purposes.
enterprise governance. The set of responsibilities and practices exercised by executive management and the board of directors with the goal of providing strategic direction, ensuring that objectives are achieved, ascertaining that risks are managed appropriately, and verifying that the organization’s resources are used responsibly. It is wider than, and inclusive of, corporate governance.
feedback. Accounting and non-accounting reports and other information that assist managers in monitoring performance and in focusing on problems and/or opportunities that might otherwise go unnoticed.
financial accounting. Accounting activities concerned with providing information to external users such as stockholders, creditors, and government agencies.
finished goods. Units of output that have been completed but not yet sold to customers.
first-stage allocation. The process through which manufacturing overhead costs are assigned to activity cost pools in an activity-based costing system.
fixed cost. A cost that remains constant in total, within a relevant range, even as activity changes. On a per unit basis, it varies inversely with changes in activity.
flexible budget. A budget that has been designed to cover a range of activity and that can be used to develop budgeted costs at any point within that range to compare to actual costs incurred.
free cash flow. The amount of cash available from operations after adjusting for capital expenditures and cash dividends paid; calculated by subtracting capital expenditures and cash dividends paid from operating cash flow;
horizontal analysis. A technique for evaluating a series of financial statement data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage.
ideal standards. Standards in a standard costing system that allow for no machine breakdowns or other work interruptions and that require peak efficiency at all times.
incremental cost. Any change in cost between two alternative courses of action under consideration.
incremental revenue. Any change in revenue between two alternative courses of action under consideration.
indirect cost. Any cost that cannot be easily and conveniently traced to a specified cost object.
indirect labor. Labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently and easily traced to individual units of product.
indirect materials. Materials costs for small items such as glue and nails that are an integral part of a finished product but cannot be conveniently and easily traced to individual units of product.
intellectual capital. Comprised of human capital (knowledge, skills, experience), relational capital (external relationships including customers and suppliers), and structural capital (knowledge that remains within the entity and includes procedures and systems).
internal control. The entire system of controls, both financial and non-financial, established in order to provide reasonable assurance of effective and efficient operation, internal financial control, and compliance with laws and regulations.
internal rate of return. The rate or return promised by a capital investment project over its useful life. It is the discount rate at which the present value of all cash inflows exactly equals the present value of all cash outflows so that the net present value is zero.
inventory turnover ratio. A liquidity measure that shows the number of times on average that inventory is sold during the period; calculated by dividing cost of goods sold by the average inventory during the period.
investment center. A business segment whose manager has control over costs, revenues, and invested funds.
joint cost. Any cost incurred up to the split-off point in a process that produces joint products.
joint products. Two or more items that are produced using a common input.
just-in-time (JIT). A production and inventory control system where raw materials are purchased and units of output are produced only on an as-needed basis to meet customer demand.
keep or drop decision. Decision resulting from a relevant cost analysis concerning whether a product line or segment should be retained or dropped.
knowledge management. A collective phrase for a series of processes and practices used by organizations in order to increase their value by improving the effectiveness of the generation and application of intellectual capital.
liquidity. The ability of a company to pay its short-term obligations as they are expected to become due within the next year or operating cycle.
liquidity ratios. Measures of the company’s ability to pay its short-term obligations as they become due and to meet unexpected needs for cash as they arise.
make or buy decision. Decision resulting from a relevant cost analysis concerning whether an item should be produced internally or purchased from an outside source.
management by exception. A system of management which involves setting standards for various operating activities and then comparing actual results to these standards, with any significant differences being brought to the attention of management as “exceptions.”
managerial accounting. Accounting activities concerned with providing information to managers for planning and control purposes and for making operating decisions.
manufacturing overhead. Any manufacturing cost that cannot be classified as direct labor or direct materials.
manufacturing overhead budget. A detailed plan that shows all production costs except direct materials and direct labor that are expected to be incurred over a specified time period.
marketing or selling costs. Any cost associated with securing customer orders and delivering the finished product or service into the hands of the customer.
master budget. A summary of the organization’s plans in which specific targets are set for sales, production, distribution, and financing activities; generally includes a cash budget, budgeted income statement, and budgeted balance sheet.
merchandise purchases budget. A detailed plan that shows the amount of goods a merchandising company must purchase from suppliers during the period in order to cover projected sales and provide desired levels of ending inventory.
mission and vision statements. Statements that aim to describe the purpose of an organization, define its success, outline its strategy, and share its values.
mixed cost. A cost that contains both fixed and variable elements.
net operating income. Income before interest and income taxes have been deducted.
net present value. The difference between the present value of all cash inflows and the present value of all cash outflows associated with a capital investment project.
operating assets. Cash, accounts receivable, inventory, plant and equipment, and any other assets held for productive use by an organization.
operating department. Any department or segment within an organization within which the central purposes of the organization are carried out.
operating lease. An agreement allowing one party (the lessee) to use the asset of another party (the lessor) in an arrangement accounted for as a rental.
opportunity cost. The potential benefit that is foregone when one alternative is selected over another.
outsourcing. The use of external suppliers as a source of finished products, components, or services. Also known as contract manufacturing or subcontracting.
payback period. The length of time that it takes for a capital investment project to fully recover its initial cash outflows from the cash inflows that it generates.
performance report. A detailed report which compares budgeted data with actual results.
period cost. Any cost that is reported on the income statement in the period in which it is incurred or accrued; such costs consist of marketing and administrative expenses.
planning. Selecting a course of action and specifying how it will be implemented.
planning and control cycle. The flow of management activities through planning, directing and motivating, and controlling, and then back to planning again.
post-audit. The follow-up that occurs after a capital investment project has been approved and implemented to determine whether expected results are actually realized.
practical standards. Standards in a standard costing system that allow for normal machine downtime and other work interruptions, and which can be attained through the reasonable but highly efficient efforts by the average worker.
predictive accounting. The use of process information to project future financial and non- financial performance.
present value. The value today of an amount to be received at some future date after taking current interest rates into account.
prime cost. Cost of the inputs to the production process. It is the sum of direct materials costs plus direct labor costs.
process reengineering. Improving operations by completely redesigning business processes in order to eliminate unnecessary steps, minimize errors, and reduce costs.
product cost. Any cost associated with the purchase or manufacture of goods; not reported on the income statement until the period in which the finished product is sold; such costs consist of direct materials, direct labor, and manufacturing overhead.
production budget. A detailed plan that shows the number of units that must to be produced during a period in order to cover projected sales and provide desired levels of ending inventory.
profit center. A business segment whose manager has control over costs and revenues but not over invested funds.
profit margin ratio. A measure of profitability that shows the percentage of each sales dollar that flows through to net income; calculated as net operating income divided by net sales.
profitability index. The ratio of the present value of a capital investment project’s cash inflows to the present value of its cash outflows.
profitability ratios. Measures of the income or operating success of a company over a given period of time, usually one year.
quality of earnings. Refers to the level of full and transparent information that is provided to external users of a corporation’s financial statements.
ratio. An expression of the mathematical relationship between two or more financial statement items that may be expressed as a percentage, a rate, or a proportion.
ratio analysis. A technique for evaluating financial statements that expresses the relationship among two or more selected financial statement items.
raw materials. Materials that are used to manufacture a finished product.
reciprocal allocation method. A method of allocating service department costs to operating departments that gives full recognition to interdepartmental services.
required rate of return. The minimum rate of return that any capital investment project must yield in order for it to be considered acceptable.
residual income. The net operating income of an investment center that exceeds its minimum required return on operating assets.
responsibility accounting. An accountability system under which managers are held responsible for differences between budgeted and actual results only for those items of revenue and expense over which they can exert significant control.
responsibility center. Any business segment whose manager has control over cost, revenue, and/or invested funds.
return on equity. A measure of profitability that shows the efficiency with which operating assets were used to generate returns to stockholders; can be calculated by dividing net operating income by average common stockholders’ equity.
return on investment. A measure of profitability that shows the efficiency with which operating assets were used to generate operating profits; can be calculated by dividing net operating income by average operating assets or by multiplying profit margin by asset turnover rate.
sales budget. A detailed schedule that shows the expected sales for coming periods, typically expressed both in dollars and in units.
second-stage allocation. The process by which activity rates are used to apply costs to products and customers in activity-based costing.
segment. Any part of an organization that can be evaluated independently of other parts and about which management seeks financial data.
segment margin. The amount remaining after a segment’s traceable fixed costs have been subtracted from its contribution margin. It represents the amount available after a segment has covered all of its own traceable costs.
sell or process further decision. Decision resulting from a relevant cost analysis concerning whether a joint product should be sold at the split-off point or sold after further processing.
selling and administrative expense budget. A detailed plan that shows the expected selling and administrative expenses that will be incurred during a specified period of time.
service department. Any department that provides support or assistance to operating departments but does not directly engage in production or other operating activities.
simple rate of return. The rate of a return on a capital investment project that is determined by dividing its annual accounting net operating income by the initial investment required. Also referred to as Accounting Rate of Return.
solvency. The ability of a company to pay interest as it comes due and to repay the principal amount of a debt at its maturity.
solvency ratios. Measures of the ability of a company to pay its long-term obligations as they become due and to survive over time.
special order. Any one-time order that is not considered part of the organization’s normal ongoing business.
split-off point. The point in the manufacturing process where some or all of the joint products can be recognized and sold as individual products.
static budget. A budget created prior to the onset of the budgeting period that is valid only for the planned activity level.
step allocation method. A method of allocating service department costs to operating departments that allocates service department costs to other service departments as well as to operating departments in a sequential fashion that typically starts with the service department that provides the greatest amount of service to other departments.
strategic enterprise management. An approach to strategic management which focuses on creating and sustaining shareholder value through the integrated use of best practice modeling and analysis techniques, technologies, and processes in support of better decision making.
strategic planning. The formulation, evaluation, and selection of strategies for the purpose of preparing a long-term plan of action in order to attain objectives.
sunk cost. Any cost that has already been incurred or that cannot be changed by any decision made currently or in the future.
theory of constraints. A management approach that emphasizes the importance of managing bottlenecks caused by scarce resources.
times interest earned ratio. A solvency measure of the company’s ability to meet interest payments as they come due that can be calculated by dividing income before interest expense and income taxes by interest expense.
total manufacturing cost. Cost of all inputs to the production process during a period. It is the sum of direct materials used, direct labor incurred, and manufacturing overhead.
total quality management. An integrated and comprehensive system of planning and controlling all business functions so that products and services are produced which meet or exceed customer expectations.
traceable fixed cost. Any fixed cost that is incurred because of the existence of a particular business segment.
transaction driver. In activity-based costing, a simple count of the number of times an activity occurs.
treasury management. The corporate handling of all financial managers, the generation of internal and external funds for the business, the management of currencies and cash flows, and the complex strategies, policies, and procedures of corporate finance.
value chain. The major business functions that add value to an organization’s products or services, such as research and development, product design, manufacturing, marketing, distribution, and customer service.
value-based management. The process of searching for and implementing those activities that will contribute most to increases in shareholder value.
variable cost. A cost that varies in total, within a relevant range, in direct proportion to changes in activity. On a per unit basis, it remains constant as activity levels change.
variable cost ratio. The ratio of total variable costs to total revenues, or the ratio of unit variable cost to unit selling price. It is used in cost-volume-profit analysis.
variable costing. A costing method that treats only the variable manufacturing costs (direct materials, direct labor, and variable overhead) as product costs while it treats fixed overhead as a period cost. It is also referred to as direct costing.
vertical analysis. A technique for evaluating financial statement data that expresses each item in a financial statement as a percent of a base amount.
work in process. Units of product that have been only partially completed and will require further work before they are ready for sale to customers.
working capital (Net). A measure used to evaluate a company’s liquidity and short-term debt- paying ability that can be calculated by subtracting total current liabilities from total current assets.
XBRL. A computer language for financial reporting known as Extensive Business Reporting Language. It allows companies to publish, extract, and exchange financial information through the Internet and other electronic means in a standardized manner.
zero-based budget. A method of budgeting that requires managers each year to justify all costs as if the programs involved
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