Cost Behavior
the reaction of costs to changes in levels of activity
Fixed Cost
a cost that remains constant in total regardless
Variable Cost
a cost that change in total proportionately with changes in the level of activity
Relevant Range
the range of activity within which cost behavior assumptions are valid
Mixed Cost
a cost that has both a fixed cost and a variable cost component
Engineering Approach
a method of separating mixed cost into its fixed and variable components using experts that are familiar with the technical aspects of the activity and associated cost
Scatter Graph Approach
a method of separating a mixed cost into its fixed and variable components by plotting historical activity and cost data to determine how the cost relates to various levels of activity
High-low method
a method of separating a mixed cost into its fixed and variable components using the mathematical differences between the highest and lowest levels of activity and cost
Regression Analysis
a method of separating a mixed cost into its fixed and variable components using fairly complex mathematical formulas
Least-squared method
another name for regression analysis
Absorption costing
a costing method where product cost includes all the costs to acquire products and get them ready to sell regardless of whether the costs are variable or fixed. GAAP require businesses to use absorption costing for financial accounting
Variable Costing
a method of voting where only the costs to acquire products or to get them ready to sell that vary with output are treated as product costs. In other words, only variable product costs are treated as product costs
Contribution Margin
the amount remaining after all variable costs have been deducted from sales
Contribution Margin Ratio
the contribution margin expressed as a percentage of sales
Cost-volume profit analysis
the analysis of the relationships between cost and volume and the effect of these relationships on profit
Break-even
the point at which sales and costs are equal so the enterprise generates neither a profit nor a loss
Break-even point
the level of sales required to achieve break-even. This can be expressed either in sales dollars or in number of units sold
Sensitivity Analysis
a technique used to determine the effect on cost-volume-profit when changes are made in the selling price, cost structure and volume used in the CVP calculations
Relevant Cost
a cost or cash outflow that is pertinent to a particular business decision. A relevant cost is a future cost that differs between alternatives
Relevant benefit
a benefit that is pertinent to a particular business decision. A relevant benefit is a future benefit that differs between alternatives
Sunk Cost
a past cost that cannot be changed by current or future actions
Quantitative Factors
factors that can be measured by numbers
Qualitative Factors
factors that cannot be measured by numbers- they must be described in words
Time Value of Money
the interest earning potential of cash
Special Order
an order that is outside a company's normal scope of business activity
Outsourcing
buying services, products, or components of products instead of producing them
Opportunity Cost
the benefit foregone because one alternative is chosen over another
Segment Margin
the amount of income that pertains to a particular part of a comapny
Capital Projects
another name for capital investments
Capital Budgeting
the planning and decision process for making investments in capital projects
Organizational goals
the overall objectives of the company. They outline why the organization exists and are a combination of financial and non financial goals
Mission Statement
a summary of the main goals of the organization
Core Values
what defines our perception of what is most important in life and also defines a sense of right and wrong, of just and unjust
Vision
management's dream for the company's future-- the hope for where the company is going and how will it get there
Strategy
the plan of attack for furthering the company's vision and creating earnings
Balanced Scorecard
an integrated set of performance measures organized around four distinct perspectives--financial, customer, internal, and innovation and learning
Strategic Plan
a long-range plan that sets forth the actions a company will take to attain its organizational goals
Capital Budget
the budget that outlines how a company intends to invest its scarce resources in long-lived productive assets
Operating Budget
the budget that plans a company's routine day-to-day business activities for one to five years
Capital Assets
long-lived expensive items such as land, buildings, machinery, and equipment
Cost of capital
the cost of obtaining financing from all available financing sources. Generally the rate of return required for capital investments
Required Rate of return
another name for cost of capital
Hurdle Rate
another name for cost of capital
Weighted Average Cost of Capital
the combined cost of debt financing and equity financing
Blended cost of capital
same thing as the weighted average cost of capital
Cost of debt capital
The interest a company pays to its creditors
Cost of Equity capital
what equity investors give up when they invest in one company rather than another
Scarce Resources
a term describing the limited amount of money a company has to invest in capital projects
Net Cash Flows
cash inflow less cash outflow
Relevant net cash flows
future net cash flows that differ between or among the alternatives being considered
Time Value of Money
the increase in the value of cash over time due to investment income
Discounting Cash Flows
determining the present value of cash to be received in the future
Profitability Index
a method used to rank acceptable proposed capital projects
Internal Rate of Return
the calculated expected percentage return promised by a proposed capital project
Time-adjusted rate of return
another name for internal rate of return
Payback Period
a capital budgeting technique that measures the length of time a capital project must generate cash flows that equal the original investment in the project
accounting rate of return
the rate of return for a capital project based on the anticipated increase in accounting operating income due to the project relative to the amount of capital investment required
Future Value
the value of a payment, or series of payments, at some future point in time calculated at some interest rate
Simple Interest
interest calculated on the original principal amount invested only
Compound Interest
interest calculated on the original principal amount invested plus all previously earned interest
Annuity
a stream of equal periodic cash flows
Present Value
the amount future cash flows are worth today based on an appropriate interest rate
Financial Calculator
a calculator that can provide an array of information regarding the time value of money including future and present value