Glossary

100-percent bonus plan Labor wage incentive plan that is a variation of the straight piecework plan based on time per unit of
output.
A posteriori method an approach to setting profit objectives in which planning takes precedence over the determination of
profit objectives, and objectives emerge as the product of planning itself.
A priori method An approach to setting profit objectives in which management first specifies a given rate of return and then
seeks to realize that rate in the long run.
ABC Actively based costing
ABC plan (also called selective control) a material control method which evaluates the cost significance of each item as high-
value (A item), middle value (B item), or low-value (C item). Not to be confused with actively-based costing.
Absorption costing (also called conventional costing or full costing) matching some or all of the fixed manufacturing cost with
units of product and then expensing these costs as part of the income statement’s cost of goods sold figure when the related
units are sold.
Accelerated cost recovery system (ACRS) A system for recovering the cost of capital expenditures which replaces the useful-life
concept with a shorter recovery period and accelerates depreciation rates.
Accountability reporting results to higher authority for the purpose of measuring the extent to which objectives are reached.
Accountings rate of return method (also called the average annual return on investment method) A technique for evaluating
an investment proposal by comparing the estimated accounting rate of return with a target rate of return.
Activity In the pert system, the time and resources necessary to move from event to another.
Activity driver In ABC, a base used o allocate the cost of an activity to products, customers, or other final cost objects.
Activity-based costing (or ABC) a system in which multiple overhead cost pools are allocated using bases that include one or
more non-volume related factors. Not to be confused with selective control, which is sometimes, called ABC.
Actively based management (ABM) detailed analyses of activities and expenses created by those activities, used as a base for
controlling and approving efficiency, or the use of information obtained from activity-based costing to make improvements in a
firm.
Actual cost system (Also called historical cost system) A method of collecting cost information as cost is incurred. Presentation
of results is delayed unit the end of the accounting period.
Actual overhead Total indirect manufacturing cost.
Administrative expenses budget A list of the estimated costs of administrative functions.
Administrative expenses Expenses incurred in directing and controlling the organization.
Algebraic method (also called simultaneous method) A method of distributing service department costs which considers
completely all interrelationship among all service department.
Allowable budget (also called budget allowable) A budget adjusted to reflect the actual level of activity experienced during the
reporting period.
Applied overhead the amount of overhead charged to products manufactured during the period.
Appraisal costs Costs incurred to detect product failure.
Arbitrary transfer pricing A method of pricing intra-company transfers in which the price is set by central management.
Authority The power to direct the others to perform or not perform activities.
Autocorrelation (also called serial correlation) A pattern in which the observations around the regression line appear to be
correlated with one another.
Average annual return on investment method Same as accounting rate of return method
Average cost method An inventory cost method which assumes that the cost of each issue of materials is mix if costs of all
shipments that are in stock at the time the issue occur.
Average unit cost method A method of allocating joint production cost to joint products by apportioning the joint production
cost among the various products on the basis of an average unit cost.
Avoidable cost An expenditure that can be avoided if an activity is abandoned or discontinued.
Backflush costing (also called backflushing or backflush accounting) A method of cost accumulation which works backward
through the available accounting information after production is completed. This is useful in settings in which processing speeds
are extremely fast.
Balance sheet A financial statement showing financial position (assets, liabilities, and owners equity) at the end of period. The
balance sheet complements the income statement.

Bar codes Symbols that can be processed electronically to identify numbers. letters or special characters.
Base (also called overhead allocation base or overhead rate base) The factor included as the denominator when computing an
overhead rate, or an activity to which costs are attributed for overhead accounting purposes.
Base rate (also called job rate) the basic pay for work performed.
Basic standard A yardstick against which expected and actual performances are compared.
Batch-level costs Costs caused by the numbers of batches produced and sold (example: setup cost.)
Batch-level driver In ABC, a measure of an activity that varies with the number of batches produced (example: setup hours)
Bill of materials The list of materials requirements for each step in the production process.
Billing rate (also called sold-hour rate, charging rate or transfer rate) A device for distributing overhead cost, based on the idea
that departments purchase internal services the same way they purchase materials, supplies and labor.
Blanket purchase orders agreements with vendors stating the total quantities expected to be needed over a period of three or
six months.
Break-even analysis A method of determining the level of sales and mix of products required to just recover all costs incurred
during the period.
Break-even point The point at which cost and revenue are equal, at this point there is neither a profit nor a loss.
Budget The quantified, written expression of management’s plan.
Budget Allowance (also called allowable budget) A budget adjusted to reflect the actual level of activity experienced during the
reporting period.
Budget committee The group which directs the budgeting process, usually composed of the sales manager, the production
manager, the chief engineer, the treasurer, and the controllers.
Budgeted balance sheet A balance sheet for the end of budget period, incorporated changes in assets, liabilities, and stock
holder’s equity resulting from the budgets submitted by the various departments, functions or segments.
Budgeted cost of goods manufactured and sold statement A list of manufacturing cost including estimates for direct material,
direct labor and applied overhead required for the budgeted period.
Budgeted coat of materials required for production A manufacturing budget which specifies the quantity and cost of materials
required to meet the budget production requirements.
Budgeted income statement A summary of sales, manufacturing and expenses budgets with projects net income.
By-product A product of relatively small total value that is produced simultaneously with a product of great total value.
Cafeteria plan An employee benefit plan under which each employee can apply a specified dollar amount to part or all of the
cost of various benefits.
Capacity costs Fixed costs that must be incurred in order to manufacture and/or market a given quantity of products.
Capacity budgeting The process of planning, evaluating and controlling capital expenditures.
Capital expenditures A cost which is intended to benefits future periods and is reported as an asset.
Capital-employed turnover rate sales divided by capital employed.
Cash budget A detailed estimates of anticipated cash receipts and disbursements for specific period.
Cell (also called work cell) An assemblage of workers and machines responsible for the entire production of one product or part,
or a family of very similar ones.
Certified management Accountant (CMA) The professional certification of a person engaged in cost accounting or other
managerial accounting functions within an organization.
Charging rate (also called billing rate, sold-hours, or transfer rate) A device for distributing overhead costs, based on the idea
that departments purchase internal services the same way they purchase materials, supplies and labor.
Charts of accounts A list of all accounts used in an accounting system, designed to supply maximum information with a
minimum of supplementary analyses.
Clock card A card which shows the time a worker started and stopped work each day or shift of the payroll period.
Coefficient of correlation A measure of the extent to which two variables are related linearly.
Coefficient of determination The Square of the coefficient of correlation. It is the percentage of variance in the dependent
variable explained by the independent variable.
Coefficient of variation The ratio of the standard deviation of the probability distribution to its expected value.
Commercial expenses marketing expenses and administrative expenses.
Committed fixed costs expenditures that require a series of payments over a long term period of time.
Common costs Non-traceable costs incurred for the benefit of more than one functional classification or business unit.
Computer integrated manufacturing A fully automated, computer generated manufacturing system.
Conditional probabilities Probabilities of events which are in some way related to or conditional upon the occurrence of other
events.
Conditional value The value of an event if it occurs (i.e., the profit, contribution margin, or cost) that will occur if the event
occurs.
Constraints Resource limitations in linear programming problems.
Continuous quality improvement An ongoing, company wide effort to improve efficiency and quality, characterized by
sensitivity to the customer’s needs and dynamic, Flexible interaction with changing conditions.
Contribution margin ratio (C/M) the portion of each sales dollar available to recover fixed costs and provide a profit.
Contribution margin (also called marginal income) The difference between sales revenue and variable cost.
Control Management’s systematic effort to achieve objectives by comparing performance to plans and acting to correct
difference between two.
Controllable variance The difference between the actual factory overhead incurred and the budget allowance based on the
standard amount of the allocation base allowed for actual production.
Controller The executive manager responsible for the accounting functions.
Controlling account A general ledger account that summarizes financial data contained in subsidiary records.
Conventional costing (also called absorption costing or full costing) matching some or all of the fixed manufacturing costs with
units of product and then expensing these costs as part of the income statement’s cost of goods sold figure when the related
units are sold.
Correlation A measure of the co-variation between two variables the independent variable and dependant variable.
Cost accounting standards board(CASB) this board established by congress in 1970, sets cost accounting standards for domestic
companies that are awarded large federal contracts or subcontracts.
Cost accounting calculations of costs for the purpose of planning and controlling activities, improving qualities and efficiency,
and making decisions, also refers to management accounting.
Cost analysis budget A department flexible budget which includes all expenses and allocates budgeted expenses of service
departments to operating departments at correspondence capacity levels. its purpose is to discover the departmental
differential cost.
Cost department This department, under the controller’s direction, gathers and communicates information about a company’s
activities.
Cost object any item or activity for which cost are accumulated and measured.
Cost of capital The expected return that investors demand for a given level of risk.
Cost of production report A process cost report presenting the amount of costs accumulated and assigned to production during
a month.
Cost pools categories into which overhead is divided for the purpose of calculating multiple overhead rates.
Cost price variance changes in elements of cost.
Cost sheet (also called job order cost sheet) A list on paper, or in electronic form, of details about the cost of manufacturing a
specific job.
Cost-volume variance changes in cost caused by changes in the quantity of products.
Cost-based transfer pricing A method of pricing intracompany transfers based on cost (actual or standard cost, based on direct
or absorption cost)
Cost-plus transfer pricing A method of pricing intracompany transfers which includes the cost to manufacture plus a normal
profit markup.
Cost-volume-profit analysis A method of determining the sales volume and mix of products necessary to achieve a desired level
of profit with available resources.
CPM critical path method
Crash time In PERT/cost, the time saved in completing an activity that results from the incurrence of additional costs.
Critical path method (CPM) (also called program evaluation and review technique or PERT) A network analysis method for
planning, measuring progress to schedule, evaluating changes to schedule, forecasting future progress, and predicting and
controlling costs.
Critical path In the PERT system, the longest path through the network.
Current standards performance guidelines for expected results, normal results or ideal maximum results (see expected actual
standard, normal standard and theoretical standard)
Cycle review method (also called order cycling method) A materials control method which periodically examines the status of
quantities on hand for each item or class of materials.
Daily time report A report which lists all jobs worked on by an employee during one day.
Data processing system The procedures, forms and equipments used for data processing.
Data processing Collecting, classifying, analyzing and reporting the data.
Decentralization A management philosophy that attempts to make each division of business of as autonomous as practical.
Decision package In zero-based budgeting, a report for each activity or operation under a manager’s control. The package
includes analysis of cost, purpose, alternative courses of action, measures of performance, consequences of not performing the
activity and benefits.
Decision tree A graphic representation of the decision points, the alternatives actions available to the decision maker, the
possible outcomes from each decision alternative along with their probabilities and the expected value of each decision.
Deferred compensation plan A plan under which each employer agrees to pay benefits to an employee more than one year in
future.
Departmentalization dividing a plant into functional segments called departments.
Differential cost pricing A pricing method which uses the differential cost as a basis for pricing.
Differential cost study An analysis undertaken to determine the desirability of a proposed project or activity that does not
extend beyond one year.
Differential cost (also called marginal cost or incremental cost) The cost that must be incurred to complete a proposed project
or to extend an activity already undertaken.
Direct costing (also called variable costing) A costing method in which costs allocated to units of production include only the
variable manufacturing costs. Fixed overhead is expensed.
Direct departmental cost A cost which is traceable to the department in which it originates.
Direct expenses Expenses that can be traced directly to a function or department.
Direct labor labor that converts direct material into the finished product and can be assigned feasibly to a specific product.
Direct labor budget A manufacturing budget which estimates the labor costs required to meet the production budget.
Direct materials Materials that form an integral part of the finished product and that are included explicitly in calculating the
cost of product.
Direct materials budget A manufacturing budget which specifies the quantity and cost of materials required to meet the
production budget.
Direct method A method of distributing service departments costs by allocating costs only to producing departments.
Discretionary fixed costs (also called programmed fixed cost) Expenditures which are fixed as a result of management policy.
Discount rate The interest rate used in adjusting a future cash flow to present value.
Discounted cash flow rate of return method (also called internal rate of return method) A method of computing the present
value of future cash flows when the discount rate is not known but is defined as the rate that results in a capital project net
present value of zero.
Dollar value LIFO method (also called LIFO method in this glossary) A lifo method variation which reduces the cost of
administering lifo and reduces the frequency with which lifo layers must be liquidated.
Drivers In ABC, the bases used to allocate overhead costs.
Dual transfer pricing A method of pricing intracompany transfers in which (1) the producing division uses a market based, cost
plus, negotiated or arbitrary transfer price in computing its revenue from intracompany sales and (2) the variable cost of the
producing divisions are transferred to the purchasing division, together with an equitable portion of the fixed cost.
Earliest expected time In the PERT system, the earliest time that an activity can be expected to start.
Economic order quantity The amount of inventory ordered at one time that minimizes annual inventory ordering and carrying
cost.
Efficiency variance The difference between the actual number of units of the allocation base used and the standard number of
units of the allocation base allowed for actual production, multiplied by the standard factory overhead rate.
Electronic data interchange (EDI) The exchange of transaction information between a computer in one company and a
computer in another.
Electronic funds transfer system (EFTS) A computerized system for electronically carrying out banking cash transfer functions.
Equivalent unit In process costing, the amount of resource that is required to complete one unit of a product with respect to
the cost element being considered.
Event In the PERT system, a specified accomplishment at a particular instant in time.
Excess capacity greater productive capacity than a company can expect to use or an imbalance in equipment caused by poor
synchronized of interdependent machines.
Expansion investment Plant enlargement for the purpose of expanding existing markets or invading new markets.
Expected actual capacity A short-range production capacity concept which calculates an over overhead rate by basing its
numerator and denominator on the expected actual output for the period.
Expected actual standard A standard set for an expected level of activity and efficiency.
Expected value The main (AVERAGE) value of a probability distribution.
External failure costs Failure costs that occur after the product has been sold.
Factory burden (also called factory expense, factory overhead, manufacturing overhead, manufacturing expense, or indirect
manufacturing costs) indirect materials, indirect labor, and all other factory costs that cannot be conveniently indentified
specific jobs, products, or final cost objectives.
Factory cost (also called manufacturing cost or production cost) usually, the sum of three cost elements; direct materials, direct
labor, and factory overhead.
Factory expense same as factory burden.
Factory overhead analysis sheet An overhead subsidiary record listing details of overhead costs.
Factory overhead budget A manufacturing budget which follows the chart of accounts according to natural cost classification
and departmental classification.
Factory overhead Same as factory burden
Failure costs Costs incurred when a product fail.
Feasible area On a graph, the feasible solution space for a linear programming problem.
FIFO method (First in, first out) An inventory costing method which, when materials are issued, assigns then the cost of oldest
supply in stock.
Final cost objects A product, customer, or other entity which represents the last step in cost allocation.
Final sales volume variance changes in profit resulting from changes ij the number of physicals units sold.
Financial forecast An entity’s expected financial position, results of operations, and changes in cash flows, reflecting conditions
expected to exists and the course of action expected to be taken.
Financial projection An entity’s financial statement based on one or more hypothetical assumptions.
Fixed cost A cost that does not change in total as business activity increase or decrease.
Fixed efficiency variance The difference between the amount of fixed factory overhead that would be charged to production if
based on the actual number of units of allocation base used and the amount that would be charged to production based on the
standard number of units of the allocation base allowed for actual production.
Flexible budget A budget adjusted to actual volume, providing a measure of what costs should be under any given set of
conditions.
Flexible manufacturing system (FMS) An integrated collection of automated production processes, automated materials
movement, and computerized system controls to manufacture efficiently a highly flexible variety of products.
Float The time between the drawing of a check and the clearing of the check back to the bank account.
Follow-up (also called post audit) A comparison of the actual results of a capital expenditure with the outcome that was
expected when the investment project was approved.
Fringe benefits compensation to workers in addition to normal wages or salary. This can include unemployment taxes, holiday
pay, vacation pay, overtime premium pay, insurance benefits, and pension cost.
Full costing (also called conventional costing or absorption costing) Matching some or all of the fixed manufacturing cost with
units of product and then expensing these costs part of the income statement’s cost of goods sold figure when the related units
are sold.
Gain sharing plan (also called organizational incentive plan) An incentive wage plan which encourages all employees to make
suggestions and contributions and which provide awards incentive payments to all employees for improved overall productivity.
Gross revenue method A method of costing by-products in which the final inventory cost of main product is overstated to the
extent that some of the cost belongs to the by-products.
Group-bonus plan An incentive wage plan which rewards groups of workers for units produce in excess of the standard.
Heteroscedastic Characterized by differing variance at different points on the regression line.
High and low points method A method of computing the fixed and variable elements of a cost from the period of highest and
lowest activity.
Historical cost system (also called actual cost system) A method of collecting cost information as cost is incurred. Presentation
of results is delayed until the end of accounting period.
Homoscedastic Characterized by uniform distribution of observations around the regression line for all values of the
independent variable.
Hurdle rate A discount rate in excess of cost of capital used to compensate for risk and uncertainty.
Idle capacity A production capacity concept which factors in the idleness of workers and facilities due to a temporary lack of
sales. This approach sets the denominator of the overhead rate at a lower level that reflects the idleness expected.
Idle capacity variance The difference between the budget allowance based on the actual number of units of allocation base
used in actual production and the amount of factory overhead chargeable to production in the absence of a standard cost
system. The amount of the over or under absorbed budgeted fixed factory overhead in a non-standard cost system.
Improvement expenditures An investment made to improve existing products or facilities.
Imputed cost A hypothetical cost representing the cost of a resource measured by its use value (example: loss of public goodwill
that might result from lying off employees when a project is abandoned).
Incentive wage plan A payment plan which rewards workers in direct proportion to their increased high quality output.
Incremental cost (also called marginal cost or differential cost) The cost that must be incurred to complete a proposed project
or to extend an activity already undertaken.
Incremental revenue (also called marginal revenue) Revenue which provides an increment or addition to the company’s total
revenue for the period.
Indirect departmental cost A cost shared by several departments that benefit from its incurrence.
Indirect expenses non-traceable expenses incurred for more than one function or department.
Indirect labor labor not directly traceable to the construction or the composition of the finished product.
Indirect manufacturing cost (also called factory expenses, factory overhead, factory burden, manufacturing overhead,
manufacturing expenses) Indirect materials, indirect labor and all other factory costs that cannot be conveniently identified
with specific jobs, products or final cost objectives.
Indirect materials material needed for the completion of a product but not classified as direct materials because they do not
become part of the product or are insignificant in amount.
Internal failure cost Failure costs that occur during the manufacturing or production process.
Internal rate of return method (also called discounted cash flow rate of return method) A method of computing the present
value of future cash flows when the discount rate is not known but is defined as the rate that results in a capital project net
present value of zero.
Investment tax credit A direct reduction of tax liability linked to investment. This credit is an important but unstable feature of
the income tax law.
Item-layer identification method An inventory costing method which assigns the cost of the most recent purchase in stock to
each batch of materials issued to production.
Job The output identified to fill a certain customer order or to replenish an item of stock on hand.
Job order costing (also called job costing) A costing method in which cost are accumulated for each job (each batch, lot, or
customer order)
Job order cost sheet (also called cost sheet) A list, on paper or on electronic form of details about the cost of manufacturing a
specific job.
Job rate (also called base rate) The basic hourly pay for the work performed.
Joint cost The cost that arises from the simultaneous processing or manufacturing of products produced from the same process.
Joint probabilities The probability that two (or more) events will occur.
Joint products products produced simultaneously by a common process or series of processes with each product processing a
more than nominal value in the form in which it is produced.
Just-in-time (JIT) A philosophy centered on the reduction of the costs through elimination of inventory.
Labor efficiency variance The difference between actual hours worked and standard hours allowed, both measured at the
standard labor rate.
Labor productivity The measurement of production performance using the expenditure of human effort as a yard stick, the
amount of goods or services a worker produces.
Labor rate (wage or cost) variance The difference between the standard and actual rates for direct labor multiplied times the
actual hours worked.
Labor time ticket A document showing the time spent by one worker on a job order on any other task.
Latest allowable time In the PERT system, the latest time that an activity can begin and not delay completion of project.
Lead time The interval between the time an order is placed and the time the materials are on the factory floor ready for
production.
Lean production (also called stockless production or zero inventory production _ ZIP) production involving an effort to reduce
inventories of work in process and raw materials.
Learning curve theory A theory stipulated that every time the cumulative quantity of the units produced is doubled, the
cumulative average time per unit is reduced by a given percentage.
Levels of aggregation In ABC the four common levels of activities are activity costs, and activity drivers. The levels are unit,
batch, product and plant.
Life-cycle costing A product costing approach that assigns a share of all costs that are incurred over the life of a product.
LIFO method (last in first out) An item-layer identification costing method which assigns the cost of the most recent purchase in
stock to each batch of materials issued to production.
Linear programming A quantitative decision tool that permits the decision maker to find the optimal solution to a short-term
resource allocation problem without guessing.
Long-range plans (also called long range budgets) plans, typically extending three to five years into the future, which provide an
intermediate step between short-range plans and strategic plans.
Main product A manufacturer’s product of greater value.
Manufacturing budget A list of estimated manufacturing costs used to identify direct materials and direct labor costs with
products and responsible managers.
Manufacturing cost (also called production cost or factory cost) usually the sum of three cost elements i.e. directs materials,
direct labor and factory overhead.
Manufacturing expenses same as indirect manufacturing cost
Margin of safety ratio (M/S) It express as a percentage of sales
Margin of safety The difference between the targeted level of sales and the break-even-point.
Marginal cost of capital The specific cost of financing a specific project.
Marginal cost same as differential cost or incremental cost.
Marginal costing same as direct or variable costing
Marginal income/revenue same as incremental revenue.
Market value method A method of allocating joint costs to joint products on the basis of their relative market value at the split-
off point.
Market value (reversal cost) method A method of costing by-products which reduces the manufacturing cost of main product
by the excess of the by-product’s market value over its separately identifiable costs.
Market-based transfer pricing A method of pricing intracompany transfer based on the price charged to outside customers.
Marketing expenses budget A list of estimated cost of marketing activities.
Marketing expenses post-manufacturing expenses including promotion, selling and delivery.
Marketing function A unit organized to control and analyzes marketing expenses related to specific items of cost.
Materials inventory variance The standard cost of the increase or decrease in the inventory.
Materials price usage variance A material price variance recorded at the time materials are issued to the factory.
Materials purchase price variance A material price variance recorded at the time materials are purchased.
Materials quantity (or usage) variance A variance computed by a comparison of the actual quantity of materials are used with
standard quantity allowed, both measured at standard cost.
Materials record cards Cards which record each receipt and issuance of each kind of material and serve as perpetual inventory
records.
Materials requirements planning (MRP) A computer simulation for managing materials requirements based on each product’s
bill of materials, inventory status. And process of manufacture,
Materials requisition Authorization for the storeroom or warehouse to deliver specified types and quantities of materials to a
given department at a specified time.
Method of least squares (also called regression analysis) A cost behavior analysis method which determines mathematically a
line of best fit or a linear regression line through a set of plotted points.
Min-max method A materials control method which estimates a maximum quantity for each item and also provides a minimum
level to prevents stock outs during a reorder cycle.
Mix (or blend) variance The difference between the actual quantity of materials at the actual mix and the actual quantity at the
standard mix, both priced at standard cost.
Modified accelerated cost recovery system (MACRS) ACRS modified to increase the number of property classes and lengthen
the recovery periods of most kinds of depreciable property.
Monte Carlo simulations Computer simulations that contain stochastic variables.
Multi-attribute decision model (MADM) An expenditure evaluation tool that explicitly incorporates both quantitative and non
quantitative factors into the decision analysis.
Multicollinerarity A condition in which two or more independent variables in a multiple regression are correlated with one
another.
Multiple regression analysis An application and expansion of the method of the least squares, permitting consideration of more
than one independent variable.
Negotiated transfer pricing A method of pricing intracompany transfers in which the transfer price in set by negotiation
between buying and selling divisions.
Net present value index net present value divided by required investment. Used to compare projects that require different
initial investments.
Net present value method A method of computing the net present value of future cash flows to assist in capital budgeting.
Net revenue method A method of costing by-products which recognizes the need for assigning traceable cost to the by-product.
Network In the PERT system. An organized overview of all the individual activities that complete a given job or program.
Non-value added activities Business activities which expend resources without adding value to the product, or general activities
of firm, not specific to the production of any particular good or service.
Nonfinancial performance measures measurements of simple physical data, rather than accounting data, used to evaluate
performance.
Normal capacity A long-range production capacity concept which calculates an overhead rate by basing its nominator and
denominator on average utilization of the physical plant over a long time period.
Normal standard A standard set for a normal level of activity and efficiency.
Normal time The time it should take a person working at a normal pace to do a job.
Objective function In linear programming, the total contribution margin obtainable from production and sale of one or more
products in a maximization problem or a total cost in a minimization problem.
Opportunity cost The measurable value of an opportunity bypassed by rejection the best alternative use of resources.
Order cycling method (also called cycle review method) A materials control method which periodically examines the status of
quantities on hand for each item of class of materials.
Order point The point in the production process when the available quantity of materials just equal to foreseeable needs.
Organization The systematization of interdependent part into one unit.
Organization chart A chart showing an entity’s principal managements positions in order to define authority, responsibility and
accountability.
Organizational incentive plans same as gain sharing plan.
Out-of-pocket cost The cash outlay required to complete a proposed project or to extend an activity already undertaken.
Overall (or net) factory overhead variance The difference between factory overhead actually incurred and the cost of overhead
charged to work in process for the period.
Over applied overhead applied overhead in excess of actual overhead. This results in a credit balance in the factory overhead
control account.
Overhead allocation base same as base or overhead rate base
Overhead rate base same as overhead allocation base
Parallel product flow A physical production flow format in which certain portions of the work are done simultaneously and then
brought together in a final process or processes for completion and transfer to finished goods.
Payback period method (also called the payout period method) A technique for measuring the length of time required by a
project to recover the initial cash outlay.
Payoff table A table that presents both the conditional value of each event that can occur for each course of action being
considered and the expected value of each alternative based on the probabilities of the events that can occur.
Payout period method same as payback period method
Pension plan An arrangement whereby a company provides retirement benefits payments for all employees in recognition of
their work contribution to the company.
Percentage of profit to sales profit divided by sales.
Performance rating (also called rating) The pace at which observed person is working. Ratings are used to set labor standards.
PERT/cost An expansion of PERT which assigns cost to time and activities, thereby providing total financial planning and control
by functional responsibility.
PERT program evaluation and review technique
Planning The construction of the detailed operating program.
Planning, programming, budgeting system (PPBS) A method of analyzing alternatives which provides a basis for rational
decision making. This system assists in the allocation of resources and helps accomplish stated goals and objectives over a
designated time period.
Plant-level costs the cost of sustaining capacity at a production site (example: rent and insurance)
Plant-level driver In ABC, a measure of plant-level costs.
Post audit same as follow-up
Post deduction (also called post manufacturing deduction) A step of back flush costing in which the cost of completed work is
subtracted from the balance of the work in process account or an equivalent combined raw and in process account.
Posterior probability The probability, estimated after the occurrence of a related event, that one or more events will occur as a
result of the related event.
Practical capacity The production capacity of a department as influenced by internal factors such as breakdowns, unsatisfactory
materials, labor shortages and other inefficiencies.
Pragmatic method An approach to setting profit objectives in which management uses a profit standard that has been tested
empirically and sanctioned by experience.
Predetermined overhead rate An estimated rate which allows factory overhead costs to be allocated to each unit of output.
Present value The present cash equivalent of an estimated future cash flow.
Present value of an annuity The present cash equivalent of the future value of an annuity.
Prevention costs cost incurred to prevent product failure.
Prime cost direct materials cost plus direct labor cost.
Prior probability The probability estimated before the occurrence of a related event, that one or more events will occur.
Probability analysis An application of statistical decision theory that, under conditions of uncertainty, leads to more consistent
and reliable decisions than single best guesses.
Probability technically, a number between 0 and 1 that represents the likelihood of occurrence of a particular event. Or the
relative frequency of the occurrence of different recurring events.
Process costing A method in which materials, labor and factory overhead are charged to cost centers. The cost assigned to each
unit of product manufactured is determined by dividing the total cost charged to the cost center by the number of units
produced.
Process time the total time that a manufacturing process requires to produce a unit of product.
Producing department A department involved in manufacturing a product by changing the form or nature of material or by
assembling parts.
Product-level costs Costs incurred to support the number of different products produced (example: costs of product design and
development).
Product-level driver In ABC, a measure of an activity that varies with the number of different products produced and sold
(example: design changes and design hours)
Production budget The masters plan from which details concerning materials requirements are developed. Usually a list of units
required to meet the sales budget, considering beginning inventory and desired ending inventory.
Production cost same as manufacturing cost or factory cost.
Productivity-efficiency ratio The measurement of the output of an individual relative to the performance standard.
Profit maximization A business approach whose primary objective is to obtain the largest amount of profit possible.
Profit planning The process of consciously developing a well-thought-out operational plan that will achieve a company’s goals
and objectives.
Program evaluation and review technique (PERT) same as critical path method (CPM)
Programmed fixed costs same as discretionary fixed costs
Purchase orders A contract for quantities of materials to be delivered.
Purchase requisitions A list that informs the purchasing agent of the quantity and kind of materials needed.
Purchases budget A manufacturing budget which lists the quantity and costs of materials that must be purchased during the
period to meet the budgeted production requirements.
Quantitative unit method A method of allocating joint production cost to joint products by distributing the total joint cost on
the basis of some common unit measurement.
Rate of return on capital employed (also called return on investment) The ratio of profit to capital employed in a business.
Rating (also called performance rating) The pace at which an observed person is working. Ratings are used to set labor
standards.
Receiving report A report certifying quantities received, sometimes including results of inspection and quality testing.
Regression analysis same as method of least squares
Relevant range A limited range of activity within which expenditure can be accurately classified as fixed or variable.
Replacement cost method A method of costing by-products in which production cost of the main product is credited for the
replacement cost of the by-products used within a plant. The offsetting debit is to the department that uses the by-product.
Replacement expenditure Expenditure incurred by the replacement of worn-out or obsolescent assets.
Research and development (R & D) Research is planned effort to discover new knowledge which will be useful in developing a
new product or service or a new process or technique.
Development is the translation of knowledge into a plan or a design for a new product or process.
Residual income A division’s income less an amount representing the company’s cost of capital employed by the division.
Resource driver In ABC, a base used to allocate the cost of resource to the different activities using that resource (example:
square feet occupied)
Responsibility accounting and reporting An accounting system which record and reports costs incurred as a result of each
activity in the company to the individual manager who is responsible for that activity.
Responsibility The obligation to perform a duty and to be held accountable.
Return on capital employed A desired rate of return used in price setting formulas.
Return on investment (ROI) same as rate of return on capital employed.
Revenue expenditure A cost which benefits the current period and is reported as an expense.
Rework The process of correcting defectives goods.
Routing In a production process the sequence of operations to be performed.
Sales budget A realistic sales estimates based on analyses of past sales and the present market.
Sales mix variance changes in profit caused by changes in the mix of products sales.
Sales price variance The actual quantity of product sold times the changes in sales prices.
Sales volume variance Changes in the quantity of product sold priced at budgeted or standard prices.
Salvage value The amount of cash inflow expected from the final sale of a property used in a capital project at the end of the life
of the capital project.
Scatter graph method A cost behavior analysis method in which the cost being analyzed (the dependent variable) is plotted on
the Y-axis and the associated activity (the independent variable) is plotted on the X-Axis.
Scrap filings or trimmings remaining after processing materials, defective materials that cannot be used or return to the vendor,
and broken parts resulting from employee or machine failures.
Selective control same as ABC plan
Selective product flow A physical production flow format in which the product moves to different departments within the plant,
depending on what final product is to be produced.
Semi variable cost A cost that displays both fixed and variable characteristics.
Separable product cost Cost identifiable with individual product.
Sequential method (also called step method) A method of distributing service department costs in a prescribed order by a
department.
Sequential product flow A physical production flow format in which each product is processed in the same series of steps.
Serial correlation same as auto correlation
Service department A department which contributes indirectly to the manufacture of a product but does not change the form,
assembly or the nature of material.
Short-range plans (often called budgets) highly detailed plans, usually for a month, quarterly or year focusing on the
organization’s internal operations.
Simplex method A method of algebraically solving linear programming problems with more than two variables.
Simultaneous method same as algebraic method
Slack time In the PERT system, the amount of time that can be added to an activity without increasing the total time required
on the critical path.
Sold-hour rate same as billing rate, charging rate or transfer rate
Specification error The omission of important variables from the multiple-regression model.
Spending variance The difference between actual overhead and a budget adjusted to actual activity, caused by price and
quantity differences.
Split-off time The point in the manufacturing process at which joint products emerge as individual units.
Spoiled goods (also called spoilage) partially or fully completed units that are defective and are not correctable.
Standard cost pricing A pricing method which uses standard costs as a basis for pricing.
Standard cost The cost that should be attained in an efficiently operated plant at normal capacity or the predetermined cost of
manufacturing a single unit or a specific quantity of product during a specific period.
Standard cost system A system in which products, operations and processes are costed based on predetermined quantities of
resources to be used and predetermined prices of those resources.
Standard deviation The square root of the variance. Provides numerical measures of the scatter of the possible conditional
values around the expected values.
Standard error of estimate The standard deviation about the regression line. It is used to determine whether a given level of
cost variance requires management action.
Standard time The time it should take a person to do a job, including personal time, rest periods and possible delays. Standard
time is expressed in minutes per piece or units per hour.
Statement of cash flows A financial statement often accompanying the income statement and balance sheet.
Static budget A budget based on the single expected level of business activity.
Step method same as sequential method
Stochastic process A process that generates events that appears to occur at random.
Stockless production same as lean production or zero inventory production ZIP
Straight piece work plan An incentive wage plan which pays a set wage for each unit produced.
Strategic plans Long-range plans, made at high management levels, concerned with a broad view of the firm, its products, its
customers, and its environment.
Subsidiary account (also called subsidiary records) Highly specific accounts supporting a controlling account.
Sunk cost An expenditure that has already been made and cannot be recovered.
Super absorption (also called super-full absorption) A tax requirement that certain purchasing and storage cost be allocated to
inventory in addition to full manufacturing costs.
Target pricing A pricing strategy, designed to create a competitive advantage, which prices the product as if its market share
were larger than it actually is and as if its costs were less than they actually are.
Terminal value The value of all cash flows at the end of life of the project based on the reinvestment rate.
Theoretical capacity The capacity of a department to produce at full speed without interruption.
Theoretical standard A standard set for an idea or maximum level of activity or efficiency.
Theory of constraints (TOC) A specialized version of direct costing for use in short-run optimization decisions. TOC focuses on
purely variable cost and does not consider direct labor to be purely variable.
Three-variance method A method of factory overhead cost accounting in which the amount of over or under applied factory
overhead can be analyzed as spending, variable efficiency and volume variance.
Throughput In the theory of constraints (TOC), the rate at which a system generates money through sales; calculated as sales
minus the purely variable cost (direct labor is not considered purely variable).
Throughput time In production, units in process divided by units produced per day.
Time clock (also called time recorder) A mechanical instrument for recording employee time in and out of the office and the
factory.
Time ticket A ticket which shows the specific use of an employee’s work time.
Total quality management A companywide approach of quality improvement that seeks to improve quality in all processes and
activities.
Traceability The accuracy with which costs can be attributed to a particular cost object.
Transactions-based approach An overhead costing method which allows for the fact that certain significant overhead costs are
not driven by volume of output.
Transfer rate same as sold-hour rate, billing rate and charging rate.
Two-bin method A materials control method in which each stock item is stored in two bins, piles, or bundles whose quantities
are coordinated with planned order and delivery dates.
Two-variance method A method of factory overhead cost accounting which divides the balance in the factory overhead control
account between the controllable variance and the volume variance.
Under-applied overhead Actual overhead which has not been allocated to products. This results in a debit balance in the factory
overhead control account.
Unit-based system A costing system which exclusively uses unit-level measures as bases for allocating overhead to output.
Unit-level costs In ABC, costs that inevitably increase whenever a unit of product is produced. (Example; electricity cost and
inspection labor)
Unit-level driver In ABC, a measure of an activity that varies with the number of units produced and sold (example; labor hours
and machine hours)
Variable cost A cost that increase in total proportionately with an increase in activity and decreases proportionately with a
decrease in activity.
Variable costing same as direct costing
Variable efficiency variance The difference between the actual amounts of the allocation based used and the standard amount
of the allocation base allowed for actual production, multiplied by the variable factory overhead rate.
Variance A statistical measure of the scatter of possible conditional values around the expected value. Also, the difference
between actual costs and budgeted costs, or the difference between actual costs and standard costs.
Velocity in production, the speed with which units or tasks are processed in a system.
Volume variance The difference between the budget allowances based on the standard amount of the allocation base allowed
for actual production and the standard factory overhead chargeable to work in process. The amount of over or under applied
budgeted fixed factory overhead in a standard cost system.
Weighted- average cost of capital cost of capital which varies depending on the mix and proportion of the sources of funds
used to finance a business.
Weighted-average method A method of allocating joint production cost to joint products by assigning predetermined weight
factors to each unit.
Work cell same as cell
Yield variance The cost of the difference between the yield expected from actual materials input and the yield obtained.
Zero inventory production same as stockless production or lean production
Zero-based budgeting A budget planning procedure which requires all managers to justified their entire budget request in
details.