A
- Absorption Costing
- A product costing method that assigns all manufacturing costs, including fixed manufacturing overhead, to units produced, so fixed overhead is deferred in inventory until the units are sold. It is required for external reporting under GAAP.
- Activity-Based Costing (ABC)
- Activity-based costing assigns indirect costs to products through cost drivers that reflect the activities consuming resources. ABC produces more accurate per-unit costs than traditional volume-based allocation when products differ in their use of overhead activities.
B
- Balanced Scorecard
- Balanced scorecard is a performance management framework that translates strategy into four perspectives: financial, customer, internal process, and learning and growth. It supplements traditional financial KPIs with leading indicators that drive long-term value.
- Budget
- A budget is a quantitative plan of operations for a defined future period, typically a year, prepared before the period begins. It coordinates resource allocation, communicates objectives, and provides a benchmark against which to measure actual performance through variance analysis.
C
- Contribution Margin
- Contribution margin is revenue minus variable costs, the portion of each sale available to cover fixed costs and produce profit. Contribution margin ratio expresses this as a percentage of revenue and is the key driver in cost-volume-profit analysis.
- COSO Internal Control Framework
- The Committee of Sponsoring Organizations (COSO) Internal Control Framework defines five components for evaluating internal control: control environment, risk assessment, control activities, information and communication, and monitoring. SOX § 404 assessments commonly use COSO as the evaluation standard.
- Cost-Volume-Profit (CVP) Analysis
- CVP analysis examines how operating profit changes with shifts in selling price, sales volume, variable cost per unit, and fixed costs. It is used to determine breakeven volume, target-profit volume, and margin of safety.
D
- Direct Cost
- A direct cost can be traced economically and unambiguously to a specific cost object such as a product, department, or project. Direct materials and direct labor are the canonical examples.
E
- Economic Order Quantity (EOQ)
- EOQ is the order quantity that minimizes total inventory cost, balancing ordering costs against carrying costs. The classical formula assumes constant demand and instantaneous delivery.
F
- Fixed Cost
- A fixed cost remains constant in total within a relevant range of activity, regardless of volume. Per-unit fixed cost decreases as volume rises. Examples include rent, salaried supervision, and straight-line depreciation.
- Flexible Budget
- A flexible budget is recalibrated to actual output volume, separating volume effects from price/efficiency effects in variance analysis. It enables a fair comparison between actual costs and what costs should have been at the realized activity level.
J
- Joint Cost
- A joint cost is incurred before the split-off point in a process that yields two or more products simultaneously from a single input. Joint costs are allocated to products using physical units, sales value at split-off, or net realizable value methods.
K
- Key Performance Indicator (KPI)
- A KPI is a quantifiable measure used to evaluate progress toward an organizational objective. Effective KPIs are specific, measurable, aligned to strategy, and reviewed on a defined cadence.
M
- Margin of Safety
- The amount by which actual or budgeted sales exceed the breakeven point, indicating how far sales can fall before the firm incurs a loss.
- Master Budget
- The master budget is a comprehensive set of interlinked operating and financial budgets for an organization. It includes the sales budget, production budget, direct materials and labor budgets, overhead budget, SGA budget, cash budget, budgeted income statement, and budgeted balance sheet.
O
- Operating Leverage
- Operating leverage measures the sensitivity of operating income to changes in sales volume, driven by the proportion of fixed to variable costs in the cost structure. Higher operating leverage means a given percentage change in sales causes a larger percentage change in operating income.
P
- Predetermined Overhead Rate
- A rate computed before the period begins to apply manufacturing overhead to products, calculated by dividing estimated total overhead by an estimated allocation base such as direct labor hours or machine hours.
- Process Costing
- Process costing accumulates costs by department or production process and assigns average per-unit costs to identical or similar products that flow through the process. It is used when products are homogeneous and cannot be economically tracked individually.
R
- Residual Income
- The operating income a responsibility center earns above a minimum required return on its invested assets, used to reward managers for earning returns that exceed the firm's hurdle rate rather than maximizing a ratio.
- Responsibility Center
- A responsibility center is an organizational unit whose manager is held accountable for specific financial outcomes. The four canonical types are cost centers (controllable costs), revenue centers (sales), profit centers (revenue and costs), and investment centers (revenue, costs, and invested capital).
- Return on Investment (ROI)
- A performance measure that expresses a division or investment's operating income as a percentage of the average operating assets used to generate it, allowing comparison across units of different sizes.
- Revenue Recognition
- Revenue recognition under ASC 606 follows a five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price to obligations, and recognize revenue when (or as) each obligation is satisfied.
S
- Sales Variance
- Sales variance is the difference between actual revenue and budgeted revenue, decomposed into sales price variance (actual price minus budgeted price, at actual volume) and sales volume variance (actual volume minus budgeted volume, at budgeted contribution margin).
- Sarbanes-Oxley § 404
- SOX Section 404 requires public-company management to assess and report on the effectiveness of internal control over financial reporting (ICFR), and requires the external auditor to attest to management's assessment for accelerated filers and large accelerated filers.
- SOC Report
- A System and Organization Controls (SOC) report is an AICPA-defined examination of a service organization's controls. SOC 1 covers financial reporting controls; SOC 2 covers security, availability, processing integrity, confidentiality, and privacy; SOC 3 is a public-facing summary of SOC 2.
- Standard Cost
- Standard cost is the predetermined cost expected for one unit of output under normal operating conditions. Standards for materials, labor, and overhead form the basis of standard costing systems and variance analysis.
T
- Transfer Pricing
- The price charged when one division of a company sells goods or services to another division of the same company, which affects each division's reported profit and can be set using market, cost, or negotiated bases.
V
- Variable Cost
- A variable cost changes in total in direct proportion to changes in activity volume within a relevant range. Per-unit variable cost stays constant. Direct materials and direct labor are typical examples.
- Variance Analysis
- Variance analysis decomposes the difference between actual and standard results into component variances (price, efficiency, volume, mix, yield) to identify and investigate the underlying drivers of performance gaps.
Z
- Zero-Based Budgeting
- Zero-based budgeting requires each line item to be justified from a zero starting baseline every budget cycle, rather than incrementing the prior year's budget. It is resource-intensive but exposes unjustified spending that incremental budgeting perpetuates.
