Glossary for CMA Part 1

Spoilage that is recognized as a loss when discovered.

Normal Spoilage is inherent in the manufacturing process
and is unavoidable in the short run. Abnormal spoilage is
spoilage beyond the normal spoilage rate. It is
controllable because it is a result of inefficiency. It is not a
cost of good production, but rather it is a loss for the
period. Costs are assigned to the spoiled units and then
Abnormal credited to Work-In-Process inventory and debited to a
Spoilage loss account.
Method in which all manufacturing costs, variable and
fixed, are treated asProduct Costs while
nonmanufacturing costs (e.g., selling and administrative
expenses) are treated as Period Costs. Absorption
Absorption costing for inventory valuation is required for external
Costing reporting.
Evaluation involving the determination of the combination
of production processes that maximizes output (or
profits), subject to the restrictions on the required
Activity analysis resources (inputs).
Approach to budgeting that involves quantitative
expression of the activities/business processes of the
organization reflecting forecasts of workload (quantity of
drivers) and other financial requirements to achieve
strategic goals or planned changes to improve
performance. Activity-based budgeting provides greater
detail, especially regarding overhead, because it permits
the identification of value-adding activities and their
drivers. After operations, it is useful for comparing actual
Activity Based costing rates and driver usage with the amounts
Budgeting - ABB budgeted.
Expense incurred in controlling and directing an
organization, but not directly identifiable with financing,
marketing, or production operations. Salaries of senior
executives and costs of general services (such as
accounting, contracting, and industrial relations) fall under
this heading. Administrative costs are related to the
organization as a whole as opposed to expenses related
Administrative to individual departments. Also called administrative
cost expenses.
Recorded flow of a transaction from initiation (e.g., source
document) to finalization (e.g., financial statement), or
vice versa. The auditor, assuring that data are processed
correctly, appraises the material that forms the audit trail.
Audit Trail An audit trail may be either visible or invisible (e.g.,
 magnetic storage). Components of an audit trail include:
(1) source records, (2) list of transactions processed, and
(3) transaction identifiers so that reference can be made
to the source of a transaction. An audit trail allows the
tracing of transactions to control totals and from the
control totals to supporting transactions. An audit trail is
good when the tracing process is easy to accomplish.
Variable cost that may be avoided if a particular course of
action is not taken. Fixed costs are usually unavoidable in
Avoidable cost the short run.
Activities performed each time a batch of goods is
Batch-Level produced; such activities vary with the number of batches
Activities prepared.
Listing of all the assemblies, subassemblies, parts, and
raw materials that are needed to produce one unit of a
finished product. Thus, each finished product has its own
bill of materials. The listing in the bill of materials file is
hierarchical; it shows the quantity of each item needed to
Bill of materials complete one unit of the next-highest level of assembly.
Department, facility, machine, or resource already
working at its full capacity and which, therefore, cannot
handle any additional demand placed on it. Also called
critical resource, a bottleneck limits the throughput of
Bottleneck associated resources.
Point in time (or in number of units sold) when forecasted
revenue exactly equals the estimated total costs; where
loss ends and profit begins to accumulate. This is the
point at which a business, product, or project becomes
Breakeven point financially viable.
Group, usually made up of top management and the chief
financial officer, that reviews and approves, or makes
Budget appropriate adjustments to the budgets submitted from
Committee operational managers.
Budget cycle Period between one budget and the next.
Collection of procedures that describe how a budget is to
be prepared. Items usually appearing in a budget manual
include a budget planning calendar and distribution
instructions for all budget schedules. Distribution
instructions are important because, once a schedule is
prepared, other departments in the organization use the
schedule to prepare their own budgets. Without
distribution instructions, someone who needs a particular
Budget manual schedule might be overlooked.
Schedule of activities for the development and adoption
Budget Planning of the budget. It should include a list of dates indicating
Calendar when specific information is to be provided to others by
 each information source. The preparation of a master
budget usually takes several months. For instance, many
firms start the budget for the next calendar year in
September, anticipating its completion by the first of
December. Because all of the individual departmental
budgets are based on forecasts prepared by others and
the budgets of other departments, a planning calendar is
essential to integrate the entire process.
Intentional underestimation of revenues and/or
overestimation of expenses; also called budget slack.
This must be avoided if a budget is to have its desired
effects. Misstating projections of costs and revenues for
this purpose is behavior that is both dysfunctional and
Budgetary Slack unethical.
Process of expressing quantified resource requirements
(amount of capital, amount of material, number of people)
Budgeting into time-phased goals and milestones.
Tendency of consumers of a material or product in short
supply to buy more than they need in the immediate
Bullwhip effect future.
Thorough rethinking of all business processes, job
definitions, management systems, organizational
structure, work flow, and underlying assumptions and
beliefs. BPR's main objective is to break away from old
ways of working, and effect radical (not incremental)
redesign of processes to achieve dramatic improvements
Business process in critical areas (such as cost, quality, service, and
reengineering response time) through the in-depth use of information
(BPR) technology. Also called business process redesign
Process of making long-term planning decisions for
capital investments. There are typically two types of
investment decisions: (1) Selecting new facilities or
expanding existing facilities. Examples include: (a)
investments in long-term assets such as property, plant,
and equipment; and (b) resource commitments in the
form of new product development, market research,
refunding of long-term debt, introduction of a computer,
etc. (2) Replacing existing facilities with new facilities.
Examples include replacing a manual bookkeeping
system with a computerized system and replacing an
inefficient lathe with one that is numerically controlled. As
such, capital budgeting decisions are a key factor in the
long-term profitability of a firm. To make wise investment
decisions, managers need tools at their disposal that will
Capital guide them in comparing the benefits and costs of various
Budgeting investment alternatives. Many techniques used for
 evaluating investment proposals are widely available.
They include payback, Accounting Rate of Return,
Internal Rate of Return and the Net Present Value
method.
In marketing, carrying cost refers to the total cost of
holding inventory. This includes warehousing costs such
as rent, utilities and salaries, financial costs such as
opportunity cost, and inventory costs related to
perishibility, shrinkage and insurance.[1] When there are
no transaction costs for shipment, carrying costs are
minimized when no excess inventory is held at all, as in a
Just In Time production system.[1] Excess inventory can
be held for one of three reasons. Cycle stock is held
based on the re-order point, and defines the inventory
that must be held for production, sale or consumption
during the time between re-order and delivery. Safety
stock is held to account for variability, either upstream in
supplier lead time, or downstream in customer demand.
Psychic stock is held by consumer retailers to provide
Carrying cost consumers with a perception of plenty.
Budget for cash planning and control that presents
expected cash inflow and outflow for a designated time
period. The cash budget helps management keep cash
balances in reasonable relationship to its needs. It aids in
avoiding idle cash and possible cash shortages. The cash
budget typically consists of four major sections: (1)
receipts section, which is the beginning cash balance,
cash collections from customers, and other receipts; (2)
disbursement section comprised of all cash payments
made by purpose; (3) cash surplus or deficit section
showing the difference between cash receipts and cash
payments; and (4) financing section providing a detailed
account of the borrowings and repayments expected
Cash Budget during the period.
Statistical measure of Goodness-Of-Fit. It measures how
good the estimated regression equation is, designated as
r2 (read as r-squared). The higher the r-squared, the
more confidence one can have in the equation.
Statistically, the coefficient of determination represents
the proportion of the total variation in the y variable that is
Coefficient of explained by the regression equation. It has the range of
Determination values between 0 and 1.
A strategy to minimize the effect of disturbances and to
allow for timely resumption of activities. The aim of
Contingency contingency planning is to minimize the effects of a
Planning disruption on an organization. A disruption is any security
 violation, man-made or natural, intentional or accidental,
that affects normal operations
Budget that rolls ahead each month or period without
regard to the fiscal year so that a twelve-month or other
periodic forecast is always available. Method in which a
budget established at the beginning of an accounting
Continuous period is continually amended to reflect variances that
Budget arise due to changing circumstances.
Vendor managed inventory (VMI) arrangement in which
either the vendor continuously monitors a customer's
Continuous inventory or customer supplies current inventory data, so
replenishment that the vendor can make timely shipments to maintain
program (CRP) the customer's inventory at agreed upon levels.
Contribution A cost accounting concept that allows a company to
Margin determine the profitability of individual products.
Feature of a system which allows a user to have
Controllability immediate control over what the system does.
Variable costs such as direct materials, direct labor, and
variable overhead that are usually considered controllable
by the department manager. Further, a certain portion of
fixed costs can also be controllable. For example, certain
advertising spent specifically for a given department
would be an expense controllable by the manager of that
department. Advertising expenses that benefit many
Controllable departments or products are, however, Noncontrollable
Costs Costs.
Controllable Expenditures that are subject to the discretion of a
costs manager and, hence, can be kept within predefined limits.
Cost of moving from one kind of equipment or production
process to another. Conversion cost is high when
converting from a manual system to a computerized
system. It includes the cost of new equipment plus
Conversion Cost training.
Collection of costs in an organized fashion by means of a
cost accounting system. There are two primary
approaches to cost accumulation: Job Order and Process
Costing. Under a job order system, the three basic
elements of manufacturing costs-direct materials, direct
labor, and factory overhead-are accumulated according
to assigned job numbers. Under a process cost system,
Cost manufacturing costs are accumulated according to
Accumulation processing department or cost center.
Factor that has a direct cause-effect relationship to a
cost, such as direct labor hours, machine hours, beds
Cost Driver occupied, computer time used, flight hours, miles driven,
 or contracts.

Management and control of activities to help set

enterprise strategies and to determine an accurate
Cost product and service cost, improve business processes,
Management eliminate waste, identify cost drivers, and plan operations.
A cost object is a tangible input for a product
manufactured/Service provided, like labor or material. For
example a cloth manufacturing firm requires some
amount of predetermined labor and predetermined raw
material for any amount of cloth being manufactured. The
cost of employing labor can be directly fixed as “per man
per hour” or “per man per day per hour per minute per
annum”, so the labor is a cost object as you can directly
associate cost with it. Similarly the raw material like
cotton or threads or fabric can be another cost object.
Other examples may include services taken by another
firm, for example a transportation company/ courier
company can offer some service to all customers at a
fixed rate. so the cost can be directly associated with it
and the company/service can be then called as cost
Cost object object.
The direct costs attributable to the production of the
goods sold by a company. This amount includes the cost
of the materials used in creating the good along with the
direct labor costs used to produce the good. It excludes
indirect expenses such as distribution costs and sales
force costs. COGS appears on the income statement and
Cost Of Goods can be deducted from revenue to calculate a company’s
Sold – COGS gross margin. Also referred to as “cost of sales”.
Grouping of individual costs. Subsequent allocations are
made of cost pools rather than of individual costs. Costs
are often pooled by departments, by jobs, or by behavior
pattern. For example, overhead costs are accumulated by
service departments in a factory and then allocated to
production departments before multiple departmental
overhead rates are developed for product costing
Cost Pool purposes.
Limited number (usually between 3 to 8) of
characteristics, conditions, or variables that have a direct
and serious impact on the effectiveness, efficiency, and
viability of an organization, program, or project. Activities
associated with CSF must be performed at the highest
possible level of excellence to achieve the intended
Critical success overall objectives. Also called key success factors (KSF)
factors (CSF) or key result areas (KRA).
 Cross subsidization is the practice of charging higher
prices to one group of consumers in order to subsidize
lower prices for another group. State trading enterprises
with monopoly control over marketing agricultural exports
are sometimes alleged to cross subsidize, but lack of
Cross transparency in their operations makes it difficult if not
subsidization impossible to determine if that is the case.
Data theft is a growing problem primarily perpetrated by
office workers with access to technology such as desktop
computers and hand-held devices capable of storing
digital information such as flash drives, iPods and even
digital cameras. Since employees often spend a
considerable amount of time developing contacts and
confidential and copyrighted information for the company
they work for they often feel they have some right to the
information and are inclined to copy and/or delete part of
it when they leave the company, or misuse it while they
Data theft are still in employment.
1. Cost that is different for each available alternative. 2.
Difference between the costs of two or more alternatives.
Differential cost 3. Alternative term for marginal cost.
Work directly involved in making the product. Examples of
direct labor costs are the wages of assembly workers on
an assembly line and the wages of a machine tool
operator in a machine shop. Direct labor is an
Direct Labor inventoriable cost.
Schedule for expected labor cost. Expected labor cost is
dependent upon expected production volume (production
budget). Labor requirements are based on production
volume multiplied by direct labor-hours per unit. Direct
labor-hours needed for production are then multiplied by
direct labor cost per hour to derive budgeted direct labor
costs. For example, assume budgeted production of 790
units, direct labor-hours per unit of 5, and direct labor cost
Direct Labor per hour of $5. The expected labor cost equals: 790 x 5 x
Budget 5 =$19750
All the material that becomes an integral part of the
finished product. Examples are the steel used to make an
automobile and the wood to make furniture. Direct
materials are charged to work-in-process as an
Direct Material inventoriable cost.
Cost such as that of advertising, preventive maintenance,
research and development, that a manager may eliminate
Discretionary or postpone without disrupting the firm's operations or
cost affecting its productive capacity in the short run. A
 discretionary cost is usually specific in amount, or is
determined by a formula such as a certain percentage of
sales revenue. Also called discretionary expenditure or
managed cost.
Actual sacrifice involved in performing an activity, or
following a decision or course of action. It may be
expressed as the total of opportunity cost (cost of
employing resources in one activity than the other) and
Economic cost accounting costs (the cash outlays).
Transmission of business transactions from one
company's computer to another company's computer.
Transmission is achieved through an electronic
communication network that uses translation software to
convert transactions from a company's internal format to
a standard EDI format. Companies that participate in EDI
are referred to as trading partners. Trading partners may
be involved in on-line banking, on-line retailing, and
electronic funds transfer. There are paperless
Electronic Data transactions in an electronic format. In the case of EDI,
Interchange the auditor should be cognizant of the possible impact on
(EDI) the gathering of evidential matter.
Placing the authority to make critical decisions with those
Employee closest to the problem, for example, those in the work
Empowerment area directly affected.
Engineered Costs having a clear relationship to output. Direct
Costs materials cost is an example.
Expenditures incurred to prevent, contain, or remove
environmental contamination. Such costs are generally
expensed. However, in the following cases only, the
company may elect to either expense or defer the costs:
(1) the expenditures either extend the life or capacity of
the asset or increase the property's safety; (2) the
expenditures are made to get the property ready for sale;
and (3) the expenditures prevent or lessen environmental
Environmental contamination that may result from future activities of
Costs property owned.
Number of units of an item that could have been
produced with the given material and processing costs in
Equivalent units an accounting period. This measure is used as a
of production benchmark in allocating departmental costs.

Maximum amount a decision maker is willing to pay for

perfect information. It is the difference between expected
Expected value profit under conditions of Uncertainty and Expected Value
of perfect With Perfect Information. For example, assume that the
information expected value of perfect information is calculated as
 $2.50. There is no sense in paying more than $2.50 for
the perfect forecast; to do so would lower the expected
profit.
Limit to the amount anticipated as an expense to be
Expense Budget incurred in a future period.
Forecasting technique that uses a weighted moving
average of past data as the basis for a forecast. The
procedure gives heaviest weight to more recent
information and smaller weight to observations in the
more distant past. The reason for this is that the future
may be more dependent upon the recent past than on the
distant past. The method is effective when there is
random demand and no seasonal fluctuations in the data.
It is a popular technique for short-run forecasting by
business forecasters. Each new forecast is based on the
previous forecast plus a percentage of the difference
Exponential between that forecast and the actual value of the time
Smoothing series at that point.
Reporting of the financial position and performance of a
Financial firm through financial statements issued to external users
Accounting on a periodic basis.
Long-term profit planning aimed at generating greater
Financial return on assets, growth in market share, and at solving
planning foreseeable problems.
1. Accounting: Method of inventory valuation based on
the assumption that goods are sold or used in the same
chronological order in which they are bought. Hence, the
cost of goods purchased first (first-in) is the cost of goods
sold first (first-out). During periods of high inflation-rates,
the FIFO method yields higher value of the ending
inventory, lower cost of goods sold, and a higher gross
profit (hence the higher taxable income) than that yielded
by the last-in first-out (LIFO) method. The 'in' office
basket is an illustration of FIFO method. 2. Banking:
Method which assumes that the first-in funds (on deposit
for the longest period) are withdrawn first. Hence interest
on the account balance will be computed on the basis of
First-in, first-out the interest rate applicable at the time of its earliest
(FIFO) deposited funds.
Portion of total factory overhead that remains constant
over a given time period without regard to changes in the
volume of activity. Examples of fixed overhead are
Fixed (Factory) depreciation, rent, property taxes, insurance, and salaries
Overhead of production supervisors.
Statement of projected revenue and expenditure based
Flexible Budget on various levels of production. It shows how costs vary
 with different rates of output or at different levels of sales
volume.
Stock analysts use various forecasting methods to
determine future stock price movements, earnings, etc.
Economists use forecasting techniques in order to
Forecasting determine future economic trends.
Future-oriented is a term used in finance and economics
to describe agents that discount the future lightly and so
have a low discount rate, or equivalently a high discount
factor. Conversely, present-oriented agents discount the
future heavily and so have high discount rates, or
Future-oriented equivalently a low discount factor.
Consistency or agreement of actions with organizational
goals. It identifies the managerial principle that all of a
firm's subgoals must be congruent to achieve one central
Goal Congruence set of objectives.
Summation of numbers having no practical meaning as a
control precaution; used by auditors primarily in a
computer application. The purpose is to identify whether
a record has been lost or omitted from processing. For
example, check numbers may be summed to get a hash
total. If the total of the check numbers processed does
not agree with the hash total, a discrepancy exists, and
Hash Total investigation is required to uncover the error.
Pyramid-like ranking of ideas, individuals, items, etc.,
where every level (except the top and the bottom ones)
has one higher and one lower neighbor. Higher level
Hierarchy means greater authority, importance, and influence.
Past-periods data, used usually as a basis for forecasting
Historical data the future data or trends.
Homogeneous A group of overhead costs associated with activities that
Cost Pool can use the same Cost Driver
Condition found in a type of scatter graph; also known as
constant variance. It is one of the assumptions required in
a Regression Analysis in order to make valid statistical
inferences about population relationships.
Homoscedasticity requires that the standard deviation
and variance of the error terms (µ) are constant for all x
and that the error terms are drawn from the same
population. This indicates that there is a uniform scatter
or dispersion of data points about the regression line. If
the assumption does not hold , the accuracy of the b
Homoscedasticity coefficient is open to question.
Expense not incurred directly, but actually borne. For
example, a person who owns a home debt-free has an
Imputed cost imputed rent expense equal to the amount of interest that
 could be earned on the proceeds from the sale of the
home if the home were sold.
Forecast of fixed overhead costs, computed by adding or
Incremental subtracting a predetermined percentage from the
budgeting historical costs (or current or past budgets).
Incurred cost Cost identified through accrual basis accounting.
Plan of organization and all the methods and measures
used by a business to monitor assets, prevent fraud,
minimize errors, verify the correctness and reliability of
accounting data, promote operational efficiency, and
ensure that established managerial policies are followed.
Internal control extends to functions beyond the
accounting and financial departments. Accounting
controls encompass safeguarding assets and the
accuracy of financial records. They are designed to give
assurance that transactions are properly authorized and
are recorded to allow for financial statement preparation
in accordance with Gaap. Further, accounting controls
deal with maintaining accountability for assets, proper
authorization to access assets, and periodic
reconciliations between recorded assets on the books
and the physical assets that exist. Administrative or
managerial controls deal with operational efficiency,
adherence to managerial policies, and management's
authorization of transactions. Examples are quality control
and employee performance reports. Accounting and
administrative controls are not mutually exclusive since
some procedures and records falling under accounting
control may also be used for administrative control. An
essential ingredient in maintaining internal control is the
internal audit function. The CPA reports on the adequacy
of existing controls within the entity. The external auditor
must carefully evaluate the internal control system as a
basis to determine the degree of audit procedures
Internal Control necessary in the circumstances.
Financial data or other information accumulated by one
individual to be communicated to another within the
business entity. The information assists others in the
managerial decision-making process. Examples are
expense reports, capital budgeting analysis, and other
Internal reports designed to guide management rather than inform
Reporting outsiders.
Subsidiary record for work-in-process inventory under a
job order production system. A separate cost sheet is
kept for each identifiable job, accumulating the direct
Job Cost Sheet materials, direct labor, and factory overhead assigned to
 that job as it moves through production. The form varies
according to the needs of the company
Accumulation of costs by specific jobs, contracts, or
orders. This costing method is appropriate when direct
costs can be identified with specific units of production.
Job order costing is widely used by custom
manufacturers such as printing, aircraft, construction,
auto repair, and professional services. Job order costing
keeps track of costs as follows: (1) direct material and
direct labor are traced to a particular job; (2) costs not
directly traceable-factory overhead-are applied to
individual jobs, using a predetermined overhead rate. The
overhead rate is equal to the budgeted annual overhead
divided by the budgeted annual activity units (direct labor-
hours, machine-hours, etc.). At the end of the year, the
difference between actual overhead and overhead
applied is closed to cost of goods sold, if there is an
immaterial difference. On the other hand, if a material
difference exists, work-in-process, finished goods, and
cost of goods sold are adjusted on a proportionate basis
Job Order based on units or dollars at year-end for the deviation
Costing between actual and applied overhead.
Common manufacturing costs incurred prior to the point,
referred to as the Split-Off Point, where Joint Products
are identified as individual products. There are several
methods of allocating joint costs to the joint products,
including sales value and volume. See also Common
Joint Costs Cost; Sell-Or-Process-Further Decision.
A good example would be a car manufacturer that
operates with very low inventory levels, relying on their
supply chain to deliver the parts they need to build cars.
The parts needed to manufacture the cars do not arrive
before nor after they are needed, rather they arrive just
as they are needed. This inventory supply system
represents a shift away from the older "just in case"
strategy where producers carried large inventories in
Just In Time - JIT case higher demand had to be met.
Japanese word for card or ticket. It is essentially a
Japanese information system for coordinating production
orders and withdrawals from in-process inventory to
realize just-in-time production. Originated from the use of
cards to indicate a work station's need for additional
parts. A basic kanban system includes a withdrawal
kanban that states the quantity that a later process
should withdraw from its predecessor, a production
Kanban kanban that states the output of the preceding process,
 and a vendor kanban that tells a vendor what, how much,
where, and when to deliver.
Sum of all recurring and one-time (non-recurring) costs
over the full life span or a specified period of a good,
service, structure, or system. In includes purchase price,
installation cost, operating costs, maintenance and
upgrade costs, and remaining (residual or salvage) value
Life cycle cost at the end of ownership or its useful life.
A logic bomb is a piece of code intentionally inserted into
a software system that will set off a malicious function
when specified conditions are met. For example, a
programmer may hide a piece of code that starts deleting
files (such as a salary database trigger), should they ever
Logic bomb be terminated from the company.
Balance sheet term for capital assets held for longer than
one accounting period (usually a year) and shown at their
Long term assets book value.
(MALicious softWARE) Software designed to destroy,
aggravate and otherwise make life unhappy. See security
suite, malvertising, crimeware, virus, worm, logic bomb,
Malware macro virus and Trojan.
The key difference between managerial and financial
accounting is that managerial accounting information is
aimed at helping managers within the organization make
Managerial decisions. In contrast, financial accounting is aimed at
Accounting providing information to parties outside the organization.
Delay from the moment the order is ready for setup to its
Manufacturing completion. Sometimes called manufacturing lead time or
Cycle Time throughput time.
The manufacturing overhead budget show the expected
manufacturing over head costs for the budget period. The
budget distinguishes between variable and fixed
overhead costs. Companies fluctuate with production
volume on the basis of the following rates per direct labor
hour: indirect materials $1.00, indirect labor $1.40, utilities
$0.40, and maintenance $0.20. Thus, for 6,200 direct
labor hours budgeted indirect materials are $6,200 (6,200
x $1), and budgeted indirect labor is $8,680 (6,200 x
$1.40). The company recognizes that some maintenance
Manufacturing is fixed. The amounts reported for fixed cost are
overhead budget assumed.
Integrated information system that steps beyond first-
generation MRP to synchronize all aspects (not just
Manufacturing manufacturing) of the business, including production,
Resource sales, inventories, schedules, and cash flows. MRP-II
Planning (Mrp-Ii) uses an MPS (master production schedule), which is a
 statement of the anticipated manufacturing schedule for
selected items for selected periods. MRP also uses the
MPS. Thus, MRP is a component of an MRP-II system.
Increase or decrease in the total cost of a production-run,
from making one additional unit of an item. It is computed
in situations where breakeven point has been reached:
the fixed costs have already been absorbed by the
already produced items and only the direct (variable)
costs have to be accounted for. Marginal costs are
variable costs comprising of labor and material costs, plus
an estimated portion of fixed costs (such as
administration overheads and selling expenses). In firms
where average costs are fairly constant, marginal cost is
usually equal to average cost. However, in industries that
require heavy capital investment (automobile plants,
airlines, mines) and have high average costs, it is
comparatively very low. The concept of marginal cost is of
critical importance in resource allocation because, for
optimum results, the management must concentrate its
resources where the excess of marginal revenue over the
marginal cost is maximum. Also called choice cost,
Marginal cost differential cost, or incremental cost.
A master production schedule (MPS) is a plan for
production, staffing, inventory, etc.[1] It is usually linked to
manufacturing where the plan indicates when and how
much of each product will be demanded.[2] This plan
quantifies significant processes, parts, and other
resources in order to optimize production, to identify
bottlenecks, and to anticipate needs and completed
goods. Since an MPS drives much factory activity, its
Master accuracy and viability dramatically affect profitability.
production Typical MPS's are created by software with user
schedule tweaking.
Computer-based information system designed to handle
ordering and scheduling of dependent-demand
inventories (such as raw materials, component parts, and
subassemblies that will be used in the production of a
finished product). MRP is designed to answer three
questions: what is needed, how much is needed, and
when is it needed. The primary inputs of MRP are a bill of
materials, which tells what goes into a finished product; a
master schedule, which tells how much finished product
is desired and when; and an inventory-records file, which
Material tells how much inventory is on hand or on order. This
Requirement information is processed, using various computer
Planning (MRP) programs to determine the net requirements for each
 period of the planning horizon. Outputs from the process
include planned-order schedules, order releases,
changes, performance-control reports, planning reports,
and exception reports.
Mission statements are documents that are intended to
serve as a summary of a business's goals and values.
Their contents often reflect the fact that they are utilized
both as an internal performance enhancer and as a public
relations tool. Mission statements serve several
purposes, but at their core, they are usually intended as a
means by which a business's ownership or management
Mission attempt to attach meaning to an organization's operations
Statement beyond profit and loss statements.
Mixed cost Alternative term for semi-variable cost.
Statistical analysis that describes the changes in a
dependent variable, such as sunglass sales volumes,
associated with changes in one or more independent
variables, such as the average age of the residents of a
market area. For example, a multiple-regression analysis
might reveal a positive relationship between demand for
sunglasses and various demographic characteristics
(age, income) of the buyers-that is, demand varies
directly with changes in their characteristics. Multiple
Multiple regression thereby helps marketers to identify their best
regression prospects
Cost not subject to influence at a given level of
managerial supervision. For instance, a manager's salary
is not within the control of the manager himself. Rent of
Noncontrollable the factory building is another example. See also
Cost Controllable Cost.
Product deterioration that is expected even under the
best operating conditions. It is inherent and unavoidable
in the short run. Costs of normal spoilage are allocated to
the remaining good units in inventory. Management
establishes a normal spoilage rate that is acceptable
under a given combination of production factors. Normal
Normal Spoilage spoilage is a cost of goods produced.
A reasonable expectation of future income and expenses
from property operations. Example: An operating budget
was prepared each year for each hotel owned by the
Reit. During the year, budget analysts would compare
actual financial performance to the budget to determine
reasons for variances, especially underperformance, to
Operating Budget identify problems that needed to be resolved.
Benefit, profit, or value of something that must be given
Opportunity cost up to acquire or achieve something else. Since every
 resource (land, money, time, etc.) can be put to
alternative uses, every action, choice, or decision has an
associated opportunity cost. Opportunity costs are
fundamental costs in economics, and are used in
computing cost benefit analysis of a project. Such costs,
however, are not recorded in the account books but are
recognized in decision making by computing the cash
outlays and their resulting profit or loss.
These costs do not include forgone profits or benefits. For
corporations, outlay costs for new projects will include
Outlay Cost start-up, production, maintenance and extraneous costs.
Decision analysis tool that summarizes pros and cons of
a decision in a tabular form. It lists payoffs (negative or
positive returns) associated with all possible combinations
of alternative actions (under the decision maker's control)
and external conditions (not under decision maker's
Payoff table control). Also called payoff matrix.
Expense that is not inventoriable; it is charged against
sales revenue in the period in which the revenue is
earned, also called period expense. Selling and general
Period Cost and administrative expenses are period costs.
1. Establishment of a prior claim. 2. Right to avail of an
advantage or opportunity before others. 3. Appropriation
or seizure of something belonging to, or needed or
Preemption wanted by others.
In manufacturing, Direct Material plus Direct Labor. It
Prime Cost excludes overhead. See also Conversion Cost.
Method that aggregates manufacturing costs by
departments or by production processes. Total
manufacturing costs are accumulated by major
categories-direct materials, direct labor, and factory
overhead applied. Unit cost is determined by dividing the
total costs charged to a cost center by the output of that
cost center. Process costing is appropriate for companies
that produce a continuous mass of like units through a
series of operations or processes-generally used in such
industries as petroleum, chemicals, oil refinery, textiles,
and food processing. A Cost of Production Report is a
cost sheet used for process costing that summarizes the
total cost charged to a department and the allocation
between the ending work-in-process inventory and the
units completed and transferred to the next department or
finished goods inventory. The output of a processing
department during a given period is measured in terms of
equivalent units of production which is the expression of
Process Costing the physical units of output in terms of doses or amount of
 work applied thereto. In computing the unit cost for a
processing center, when a beginning inventory of work-in-
process exists, two specific assumptions about the flow of
cost are used-Weighted Average and FIFO. Under
weighted average, the costs in the beginning inventory
are averaged with the current period's costs to determine
one average unit cost for all units passing through the
cost center in a given month. Under FIFO, costs in the
beginning inventory are not mingled with the current
period's costs but transferred out as a separate batch of
goods at a different unit cost than units started and
completed during the period.
Schedule for expected units to be produced. It sets forth
the units expected to be manufactured to satisfy
budgeted sales and inventory requirements. Expected
production volume is determined by adding desired
Production ending inventory to planned sales and then subtracting
Budget beginning inventory.
There are several causes of alteration to the
user program, including extreme environmental
conditions, Electromagnetic Interface (EMI), improper
grounding, improper wiring connections, and
unauthorized tampering. If you suspect the memory
has been altered, check the program against a
Program previously saved program on an EEPROM,
Alteration UVPROM or Flash EPROM module
he sum established by the owner as available for the
entire project, including the construction budget, land
costs, equipment costs, financing costs, compensation for
professional services, contingency allowance, and other
Project budget similar established or estimated costs.
Collection of mathematical and statistical methods used
in the solution of managerial and decision-making
problems, also called operations research (OR) and
management science. There are numerous tools
available under these headings such as Linear
Quantitative Programming (LP), Economic Order Quantity (Eoq),
Methods Learning Curve theory, Pert and Regression Analysis.
RAID, an acronym for Redundant Array of Inexpensive
Disks or Redundant Array of Independent Disks, is a
technology that allows high levels of storage reliability
from low-cost and less reliable PC-class disk-drive
components, via the technique of arranging the devices
into arrays for redundancy. This concept was first defined
by David A. Patterson, Garth A. Gibson, and Randy Katz
RAID at the University of California, Berkeley in 1987 as
 Redundant array of inexpensive disks.[1] Marketers
representing industry RAID manufacturers later
reinvented the term to describe a Redundant array of
independent disks as a means of dissociating a "low cost"
expectation from RAID technology
Statistical technique used to establish the relationship of
a dependent variable, such as the sales of a company,
and one or more independent variables, such as family
formations, Gross Domestic Product per capita income,
and other Economic Indicators. By measuring exactly
how large and significant each independent variable has
historically been in its relation to the dependent variable,
the future value of the dependent variable can be
predicted. Essentially, regression analysis attempts to
measure the degree of correlation between the
dependent and independent variables, thereby
establishing the latter's predictive value. For example, a
manufacturer of baby food might want to determine the
relationship between sales and housing starts as part of a
sales forecast. Using a technique called a scatter graph, it
might plot on the X and Y axes the historical sales for ten
years and the historical annual housing starts for the
same period. A line connecting the average dots, called
the regression line, would reveal the degree of correlation
between the two factors by showing the amount of
unexplained variation-represented by the dots falling
outside the line. Thus, if the regression line connected all
the dots, it would demonstrate a direct relationship
between baby food sales and housing starts, meaning
that one could be predicted on the basis of the other. The
proportion of dots scattered outside the regression line
would indicate, on the other hand, the degree to which
the relationship was less direct, a high enough degree of
unexplained variation meaning there was no meaningful
relationship and that housing starts have no predictive
value in terms of baby food sales. This proportion of
unexplained variations is termed the coefficient of
determination, and its square root the Correlation
Coefficient. The correlation coefficient is the ultimate
yardstick of regression analysis: a correlation coefficient
of 1 means the relationship is direct-baby food and
housing starts move together; -1 means there is a
negative relationship-the more housing starts there are,
Regression the less baby food is sold; a coefficient of zero means
Analysis there is no relationship between the two factors.
Relevant cost 1. Cost or expense attributable or chargeable to one or
 more activities on the basis of benefits received or some
other logical relationship. 2. Differential or quantifiable
future cost that must be considered in making a particular
decision.
The deliberate damage to equipment or information. For
example, Web site defacement is an example of
Sabotage information sabotage.
Operating plan for a period expressed in terms of sales
volume and selling prices for each class of product or
service. Preparation of a sales budget is the starting point
in budgeting since sales volume influences nearly all
Sales Budget other items.
Prediction of the future sales of a particular product over
a specific period of time based on past performance of
the product, inflation rates, unemployment, consumer
spending patterns, market trends, and interest rates. In
the preparation of a comprehensive marketing plan, sales
forecasts help the marketer develop a marketing budget,
allocate marketing resources, and monitor the
Sales forecast competition and the product environment.
Internal control concept in which individuals do not have
responsibility for incompatible activities. For example, the
record-keeping or authorization function should be
divorced from the physical custody of the asset to guard
against misuse. The person who approves invoices for
payment should not be responsible for writing and signing
checks. An auditor should note situations where one
individual's responsibility extends improperly over related
areas, i.e., the person maintaining inventory records has
physical possession of the merchandise. Segregation of
duties assists in detecting errors and deterring improper
Segregation of activities. The smaller the organization, the more difficult
Duties this practice becomes.
In Linear Programming (LP) a technique for determining
how the optimal solution to a linear programming problem
changes if the problem data such as objective function
coefficients or right-hand side values change; also called
post-optimality analysis. To an alert accountant, the
optimal solution not only provides answers-given
assumptions about resources, capacities, and prices in
the problem formulation-but should raise questions about
what would happen if conditions should change. Some of
these changes might be imposed by the environment,
such as changes in resource costs and market
Sensitivity conditions. Some, however, represent changes that the
Analysis manager can initiate, such as enlarging capacities or
 adding new activities
Costs incurred beyond the split-off point and identifiable
Separable Costs with specific products.
Regression analysis that involves one independent
variable. For example, total factory overhead is related to
one activity variable (either direct labor-hours or machine-
Simple hours). Also, the demand for automobiles is a function of
Regression its price only
Juncture of production where Joint Products become
Split off point individually identifiable.
Estimated or predetermined cost of performing an
operation or producing a good or service, under normal
conditions (where special or extraordinary factors, that
may affect performance, are absent). Standard costs are
used as target-costs (or basis for comparison with the
actual costs), and are developed from historical data
analysis or from time and motion studies. They almost
always vary from actual costs, because every situation
Standard cost has its share of unpredictable factors.
A type of budget that incorporates anticipated values
about inputs and outputs that are conceived before the
period in question begins. When compared to the actual
results that are received after the fact, the numbers from
static budgets are often quite different from the actual
Static Budget results.
1. Fixed cost that increases to a new level in step with the
significant changes in activity or usage. 2. Cost that is
relatively fixed over a small volume or range of activities
Step cost but is variable over a large range or volume.
Broadly-defined plan aimed at creating a desired future.
In contrast, a long-term plan is aimed at meeting
estimated future needs, a short-term plan at meeting
current or immediate needs, and a tactical plan at
realizing interim objectives that lead to the goal(s) of a
Strategic plan strategy. See also strategic business plan.
Money already spent and permanently lost. Sunk costs
are past opportunity costs that are partially (as salvage, if
any) or totally irretrievable and, therefore, should be
considered irrelevant to future decision making. This term
is from the oil industry where the decision to abandon or
operate an oil well is made on the basis of its expected
cash flows and not on how much money was spent in
drilling it. Also called embedded cost, prior year cost,
Sunk cost stranded cost, or sunk capital.
Supervariable
Costing Treats only direct materials as the only variable cost.
Method used in the analysis of product design that
involves estimating a target cost, via a desired profit and
sales price, and then designing the product/service to
meet that cost. This method precedes Kaizen costing.
The Japanese concept of Kaizen is relevant to target
costing. A policy of seeking continuous improvement in all
phases of company activities facilitates cost reduction,
Target Costing often through numerous minor changes.
Approach to continuous improvement (reducing operating
expenses and inventory and increasing throughput)
based on a five-step procedure: (1) identifying
constraints, (2) exploiting the binding constraints, (3)
subordinating everything else to the decisions made in
the second step, (4) increasing capacity of the binding
constraints, and (5) repeating the process when new
binding constraints are identified. It seeks to identify a
company's constraints or bottlenecks and exploit them so
Theory of that throughput is maximized and inventories and
Constraints operating costs are minimized.
Throughput Method of costing a product where only the unit-level
costing direct costs are assigned to the product.
Use of historical data and mathematical techniques to
model the historical path of a price, demand for a good,
or consumption. Time series analysis is based on the
Time-series premise that by knowing the past, the future can be
analysis forecast.
Giving up one advantage in order to gain another. For
example, a trade-off may be realized by taking a financial
loss in order to gain a tax deduction that will lower total
Trade-Off tax liability.
Costs of processing a product or performing a service
from a prior department to the current department. The
costs usually occur under a Process Costing system.
Consider two processing departments in a chain-
Department A and Department B. Transferred-in costs
Transferred-in would be the costs attached to partially completed units
Costs transferred in from Department A.
A Trojan, sometimes refered to as a Trojan horse, is non-
self-replicating malware that appears to perform a
desirable function for the user but instead facilitates
unauthorized access to the user's computer system. The
Trojan horse term is derived from the Trojan Horse story in Greek
 mythology.
Unit Level Activities performed each time a unit is produced; such
Activities activities vary with the number of units produced.
1. Assessment of an action, decision, plan, or transaction
to establish that it is (1) correct, (2) complete, (3) being
implemented (and/or recorded) as intended, and (4)
Validation delivering the intended outcome.
Value-chain analysis looks at every step a business goes
through, from raw materials to the eventual end-user. The
goal is to deliver maximum value for the least possible
Value Chain total cost.

Value-Adding Cost of an operating activity that increases the market

Cost value of a product or service.
Portion of total factory overhead that varies directly with
Variable changes in volume. Examples of variable overhead are
(Factory) indirect materials, supplies, indirect labor, and fuel and
Overhead power.
A method of budgeting in which all expenditures must be
justified each new period, as opposed to only explaining
the amounts requested in excess of the previous period's
funding. For example, if an organization used ZBB, each
department would have to justify its funding every year.
That is, funding would have a base at zero. A department
would have to show why its funding efficiently helps the
organization toward its goals. ZBB is especially
encouraged for Government budgets because
expenditures can easily run out of control if it is
Zero Based automatically assumed what was spent last year must be
Budgeting - ZBB spent this year.