Glossary of finance

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ABC see activity-based costing ABM see activity-based management abnormal loss a decline in units in excess of normal expectations during a production process absorption costing a cost accumulation and reporting method that treats the costs of all manufacturing components (direct material, direct labor, variable overhead, and fixed overhead) as inventoriable or product costs; it is thetraditional approach to product costing; it must be used for external financial statements and tax returns accepted quality level (AQL) the maximum limit for the number of defects or errors in a process accounting rate of return (ARR) the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment;not based on cash flow accretion an increase in units or volume caused by the addition of material or by factors inherent in the production process activity a repetitive action performed in fulfillment of business functions activity analysis the process of detailing the various repetitive actions that are performed in making a product or providing a service, classifying them as value-added andnon-value-added, and devising ways of minimizing or eliminating non-value-added activities activity-based budgeting (ABB) a planning approach applying activity drivers to estimate the levels and costs of activities necessary to provide the budgeted quantity and quality of production activity-based costing (ABC) a process using multiple cost drivers to predict and allocate costs to products andservices; an accounting system collecting financial and operational data on the basis of the underlying nature and extent of business activities; an accounting information and costing system that identifies the various activities performed in an organization, collects costs on the basis of the underlying nature and extent of those activities, and assigns costs to products and services based onconsumption of those activities by the products and services activity-based management (ABM) a discipline that focuses on the activities incurred during the production/performance process as the way to improve the value received by a customer and the resulting profit achieved by providing this value activity center a segment of the production or service process for which management wants to separatelyreport the costs of the activities performed activity driver a measure of the demands on activities and, thus, the resources consumed by products and services; often indicates an activity’s output actual cost system a valuation method that uses actual direct material, direct labor, and overhead charges in determining the cost of Work in Process Inventory ad hoc discount a price concession made undercompetitive pressure (real or imagined) that does not relate to quantity purchased administrative department an organizational unit that performs management activities benefiting the entire organization; includes top management personnel and organization headquarters algebraic method a process of service department cost allocation that considers all interrelationships of the departments andreflects these relationships in simultaneous equations algorithm a logical step-by-step problem-solving technique (generally requiring the use of a computer) that continuously searches for an improved solution from the one previously computed until the best answer is determined allocate assign based on the use of a cost driver, a cost predictor, or an arbitrary method allocation the systematicassignment of an amount to a recipient set of categories annuity a series of equal cash flows (either positive or negative) per period annuity due a series of equal cash flows being received or paid at the beginning of a period applied overhead the amount of overhead that has been assigned to Work in Process Inventory as a result of productive activity; credits for this amount are to an overhead account...