Managerial Accounting

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residual income

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The amount ofoperating income earned above aspecifi ed minimum rate of return onassets; used to evaluate investmentcenters.

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Economic Value Added (EVA®)

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Acommercialized performance measurementsystem that emphasizes theincremental income an organizationcreates over and above the incomerequired to cover the costs of capitalinvested by both debt and equity holdersin the organization

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weighted average cost of capital(WACC)

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The average cost of a fi rm’sdebt and equity capital, weighted bythe relative amounts of each sourceof fi nancing; equals the average rateof return that a company must earnon its invested capital in order tosatisfy the demands of its owners andcreditors.

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return on investment (ROI

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A measureof operating performance andeffi ciency in utilizing assets; computedin its simplest form by dividing operatingprofi t by average total assets.

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just-in-time (JIT)

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A managementphilosophy that emphasizes removingall waste of effort, time, and inventorycosts from the organization.

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kanban

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A signaling system that pulls(rather than pushes) parts forwardthrough the production system.

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value-added activities

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Necessaryactivities in a production or serviceprocess that customers identify asvaluable and for which they are willingto pay.

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nonvalue-added activities

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Unnecessaryactivities in a productionor service process that customerstypically do not see or care about andfor which they are unwilling to pay.

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total quality management (TQM)

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Amanagement philosophy focused onincreasing profi tability by improvingthe quality of products and processesand increasing customer satisfaction,while promoting the well-being andgrowth of employees.

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statistical process control (SPC)

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A statistical technique for identifyingand measuring the quality status ofa process by evaluating its output todetermine if serious problems exist inthe process.

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costs of quality (COQ)

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Costs spentto achieve high-quality products andservices, as well as costs spent whenproducts fail to have high quality;includes prevention costs, appraisalcosts, internal failure costs, andexternal failure costs.

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prevention costs

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Costs of qualitythat relate specifi cally to design,training, and other investments toensure that processes are performedcorrectly the fi rst time and that productsand services meet customers’expectations.

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appraisal costs

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Costs of qualitythat relate specifi cally to the effort ofinspecting, testing, and sampling activitiesperformed in order to identifyand remove low-quality products andservices from the system.

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internal failure costs

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Costs ofquality that relate specifically to theexpenses that occur when low-qualityproducts and services fail duringproduction or before delivery tocustomers

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external failure costs

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Costs of qualitythat relate specifi cally to the coststhat occur when low-quality productsand services fail after delivery tocustomers.

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performance measures

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A generalterm used to describe all measuresdesigned to capture information aboutperformance related to a particularactivity or process.

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Balanced Scorecard

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A managementmodel designed to link togetherperformance measures for fi nancial,customer, internal process, andlearning/growth perspectives that areunique to an organization’s particularstrategy

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leading measures

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Measures that,if successfully implemented, willsupport desired performance in otherbusiness activities. Note that someleading measures can also serve asoutcome measures.

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outcome measures

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Measures ofdesired outcome performance inactivities critical to an organization’sstrategic goals. Note that someoutcome measures are also leadingmeasures to support desired performancein other business activities

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life cycle costing

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The process ofmeasuring all costs involved in creating,producing, and using a productor service.

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customer relationshipmanagement (CRM)

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A corporatelevel strategy that focuses on creatingand maintaining lasting relationshipswith customers in order to establishlong-term fi nancial value for theorganization

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six sigma quality

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y A measure ofquality based on statistical analysis;products or services with six sigmaquality have no more than 3.4 defectsper million opportunities (e.g., partsor events).

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leading indicators

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Measures that indicatethe potential success of futurebusiness activities; related to leadingmeasures

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lagging indicators

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Measures thatindicate the success of past businessactivities; related to outcomemeasures.