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103 Cards in this Set
- Front
- Back
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Fixed Costs |
Costs unaffected by changes in activity level (eg. Initial payment) |
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Variable Costs |
Costs that vary with the quantity output (eg. 5$/item) |
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Incremental Costs |
Additional cost resulting from increasing output of a system (eg. cost per mile of car depends on amount used) |
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Direct costs |
Costs that can be allocated to a specific output or activity. (eg. Labor and material costs) |
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Indirect Costs |
Costs difficult to attribute to specific output or activity. (eg. Cost of common tools and general supplies) |
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Overhead |
Plant operating costs not direct labour or material costs (eg. Electricity) |
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Standard Costs |
Planned costs per unit of output, established in advance of actual production. |
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Uses of standard cost |
1. Estimating future manufacturing costs 2. Measuring operating performance 3. Preparing bids on products or services 4. Establishing the value of work in process |
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Cash Cost vs. Book Cost |
Cash cost - involves cash flow Book cost - no cash transaction (depreciation) |
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Sunk Cost |
Cost incurred in the past that has no relevance to estimates of future costs revenues |
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Opportunity Cost |
Incurred because of limited resources, such that opportunity to use those resources to monetary advantage in an alternative use is forgone. (student paying $5,000 to go to school instead of making $20,000 working --> opportunity cost $25,000) |
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Life-Cycle Cost |
Summation of all costs related to product over life span |
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Investment Cost |
Capital required for most of the activities in the acquisition phase (AKA capital investment) |
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Working Capital |
Funds required to produce material that has already been owned. |
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Operation and Maintenance Cost (O&M) |
Recurring annual expense items associated with operation phase of life cycle. |
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Disposal Cost |
Nonrecurring costs of shutting down operation at end of life cycle |
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What are the 5 primary resource areas: |
1. People 2. Machines 3. Materials 4. Energy 5. Information |
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Perfect Competition |
Any product supplied by large number of vendors. No restriction on additional suppliers |
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Monopoly |
Unique product only available from single supplier |
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Index |
Dimensionless number indicating how cost or price changes over time (with respect to base year). Cn = Ck (In/Ik) |
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Power-sizing Technique |
Formula recognizing variation of cost as a power of change in capacity or size. Cn = Ck (Sn/Sk)^X |
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Interest |
Difference between amount of money lent and the amount of money later repaid. Compensation for giving up use of money during loan. |
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Interest Period |
Base unit of time over which an interest rate is calculated |
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Simple Interest |
Interest earned is not added to the principle amount used to calculate interest in the next period. |
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Compound interest |
Interest accumulated in one period is added to the principle sum from the previous period and then used to compute the interest for the next round. |
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Nominal Interest Rate |
Base annual rate divided equally into each month |
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Effective Interest Rate |
Actual interest rate when compounded each month |
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Cashflow Diagram |
Graph summarizing the timing and magnitude of cash flows as they occur over time. |
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Equivalence |
When the value of a cost at one time is equivalent to value of related benefit at a different time. |
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Mathematical Equivalence |
Consequence of mathematical relationship between time and money. F = (1+i)^N |
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Decisional Equivalence |
Consequence of indifference on part of a decision maker among available choices |
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Market Equivalence |
Consequence of ability to exchange one cashflow for another at zero cost |
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Annuity |
Set of equal disbursements or receipts over a sequence of periods |
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Arithmetic Gradient Series |
Set of disbursements that change by constant amount from one period to the next. |
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Geometric Gradient Series |
Set of disbursements that change by constant proportion from one period to the next. |
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Project |
Investment opportunity |
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Independant |
Two or more projects do not depend on whether the other is chosen or not. |
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Mutually Exclusive |
Two or more projects are mutually exclusive if, in the process of choosing one, all other alternatives are excluded. |
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Related but not Mutually Exclusive |
Expected cost of one project depends on whether or not the other is chosen. |
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Minimum Acceptable Rate of Return (MARR) |
Interest rate that must be earned for any project to be accepted.
Earning at least as much as can be earned elsewhere. |
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Cost of Capital |
Minimum returned required to induce investors to incest in company. |
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Payback Period |
Number of years it takes for an investment to be recouped. Payback period = (First Cost)/(Annual Savings) |
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Internal Rate of Return (IRR) |
The interest rate (i*), such that, when all cash flows associated with the project are discounted at (i*), the present worth of the cashflows is equal to the present worth of the outflows |
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External Rate of Return (ERR) |
The rate of return on a project where any cash flows that are not invested in the project are assumed to earn interest at a predetermined explicit rate (usually MARR) |
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Depreciation |
The loss in value of a capital asset. |
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Market Value |
Actual value an asset can be sold for in an open market. |
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Book Value |
Depreciated value of an asset for accounting purposes. (calculated using depreciation model) |
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Scrap Value |
Actual value of an asset at the end of its physical life when broken up into parts |
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Salvage Value |
Actual value of an asset at the end of its physical life when it is sold |
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Straight-line Method of Depreciation |
Model assuming that the rate of loss in value of an asset is constant over its useful life. |
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Declining-Balance Depreciation |
Models loss in value of an asset over a period as a constant fraction of the asset's current book value. |
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Financial Accounting |
Accounting concerned with recording and organizing the financial data of a business. |
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Management Accounting |
Accounting concerned with the costs and benefits of the various activities of an enterprise. |
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Assets |
Economic resources owned by an enterprise |
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Current Assets |
Cash and other assets easily converted to cash in a short period of time
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Liabilities |
Claims on a business's assets |
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Current Liabilities |
Liabilities due within short period of time |
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Owner's Equity |
Interest of the owners of a firm in its assets
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Par Value
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Price per share set by the corporation at the time the shares are originally issued |
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Retained Earnings |
Cumulative sum of earnings from normal operations in addition to gains (or losses) from transactions like sale of plant assets |
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Sole Proprietorship |
Business owned by one person |
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Partnership |
Business owned by two or more people |
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Corporation |
Business owned by shareholders |
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Financial Market |
Markets in which short- or long-term debt and equity are exchanged. |
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Performance measures |
Calculated values that allow conclusions to be drawn from data |
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Financial Ratios |
Ratios between key amounts taken from firms financial statements |
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Financial Ratio Analysis |
Comparisons of ratios computed for the same company from previous statements and with industry standards |
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Liquidity Ratio |
Evaluate ability of a business to meet current liability obligations. |
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Working Capital |
Current assets - Current liabilities |
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Leverage (debt-management) Ratios |
Extent to which a firm relies on debt for its operations |
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Efficiency (asset-management) Ratios |
Assess how efficiently a firm uses its assets |
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Progressive Tax Rate |
Higher incomes are charged larger percentage of income. |
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Tax Credits |
Real or nominal costs that are not taxed (or taxed at reduced rate) |
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Expenses |
Real costs associated with performing the corporation's business. |
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Capital Expenses |
Purchases of assets of significant value. |
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Capital Cost Allowance (CCA) |
Specific amount of depreciation that companies may claim in any year for one depreciable asset. |
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Undepreciated Capital Cost (UCC) |
The capital cost of an asset when it is purchased |
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Capital Tax Factor (CTF) |
Value that summarizes the effect of the benefit of future tax savings due to CCA |
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Capital Salvage Factor (CSF) |
Value that summarizes the effect of the loss of future tax savings when an asset is scrapped or sold. |
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Equivalent Annual Cost (EAC) |
Annual worth calculated in the context of a replacement study |
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Capacity |
Ability to produce
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Capital Cost |
Expense incurred over time because the assets required for specific capacity gradually lose their value |
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Installation Cost |
Cost of acquiring capacity, excluding purchase cost |
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Economic Life |
Lifetime that minimizes average cost per year of owning and using long-lived assets |
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One Year Principle |
Principle stating that if the capital costs for defender are small compared to the operating costs, and the yearly operating costs are monotonically increasing, the economic life of the defender is one year and total EAC is cost of using defender for one more year |
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Inflation |
Increase over time in average prices of goods and services. (Decrease of purchasing power of money) |
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Deflation |
Decrease over time of average prices |
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Inflation Rate |
Rate of increase in average prices of goods and services over specified time period |
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Consumer Price Index (CPI) |
Relates average price of a fixed "basket" of goods and services in a given period to the average price of the same basket in a base period |
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Real Dollars (constant dollars) |
Monetary units of constant purchasing power (dollars in base year) |
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Current Dollars (actual dollars) |
Monetary units expressed at the time of payment |
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Current MARR |
Minimum acceptable rate of return when cash flows are expressed in current dollars |
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Real MARR |
Minimum acceptable rate of return when cash flows expressed in real dollars |
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Sensitivity Graphs |
Graph of the changes in a performace measure brought about by one-at-a-time parameter changes |
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Breakeven Analysis |
Process of varying a parameter of a problem and determining what value causes the performance measure to reach some threshold or "break-even" value |
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Decision Tree |
Graphical representation of the logical structure of a decision problem in terms of the sequence of decisions to be made and outcomes of chance events |
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Rollback procedure (backward induction) |
Method of computing expected value at each chance node and selecting a preferred alternative at each decision node |
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Sources of Estimating Data |
Accounting records Other sources within the firm Sources outside the firm Research and development (eg. simulation) |
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Estimating Techniques |
Order of Magnitude Estimates (+/- 30%-50%) Semi-detailed or budget estimates (+/- 15%) Definitive or detailed estimates (+/- 5%) |
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Parametric Cost Estimating |
Use of historical data and statistical techniques to predict future costs. |
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Use-related physical loss |
Depreciation caused by use |
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Time-related physical loss |
Depreciation cause by stagnancy of product (not being used) |
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Functional loss |
Loss of value with not physical change (eg Car going out of style) |
