Total amount paid to acquire and set up a
capital asset.
Activity-based budgeting (ABB)
Also called activity-based costing, is the process of assigning a specific cost
to all of a company’s functions.
Amortization
Expense of an intangible asset, such as
copyrights, patents, or trademarks, allocated per month for the useful life of
the asset, which might be less than 20 years.
Balance sheet
A financial statement that shows what a
company owes and how it was financed.
Bottom line
Amount of money remaining after a company
has paid all its expenses for a period.
Bottom-up budgeting
Method used when a company builds its
budget from the ground up.
Capital appropriation request form
A document that managers use to request
capital funding for their departments; represents the first step in the
documentation process for capital projects.
Capital budgets
Budgets that plan the cost of new assets
and future capital projects and purchases for the corporation.
Capital constraints
Spending limitations established by a
company or the realities of the financial marketplace.
Cash budgets
Budgets that project the amount of cash
that a company has at its disposal, where the cash will be generated, and where
it needs to go.
Cash flow
The incremental income from a project
before depreciation.
Cash from operations
A company’s net income including non-cash
expenses, such as depreciation.
Cash position
Total cash left over from previous periods,
plus the cash from operations in the current period, plus cash gained from
financing activities, minus any cash spent on investments.
Controllable costs
Expenses that a company can influence
through management strategies.
Cost of goods sold
Cost of items that a company has
manufactured and sold or the cost of a company’s inventory purchased from a
wholesaler.
Cost per unit
Total cost of running a manufacturing
operation divided by the number of units produced.
Departmental budgets
Budgets that cover the technical support
and accounting departments.
Depreciable life
Length of time an asset will remain useful
as defined by a company’s accounting policy.
Depreciation
How a company allocates the cost of capital
assets over time.
Direct materials
Raw materials used to manufacture a
specific product.
Discounting cash flow
Method used to discount the future value of
money to the present value of money for comparison.
Economic life
The actual useful life of an asset.
Favorable expense variances
Actual expenses that are less than
budgeted.
Favorable revenue variances
Actual performance that is greater than
budgeted.
Fixed costs
Costs that can be anticipated and planned
and are not tied directly to a level of production.
Flexible budget
Budget based on a percentage of the
company’s volume, such as sales or production or ratios that eliminate the
effects of varying production levels.
Forecast
Evaluation of actual performance to date,
based on significant variances extended into the future.
Gross margin
Money left after the cost of goods has been
paid.
Hurdle rate
Minimum percentage that a capital project
will return before it will be considered.
Indirect materials
Materials that do not turn into a specific
product but are used in the manufacturing process.
Internal rate of return
Exact percentage of interest that would
return a net present value (NPV) of zero.
Labor cost per hour
Total labor cost divided by total labor
hours.
Labor cost per unit
Total labor cost divided by total units
produced.
Linear programming
A technique that tests different
combinations of projects to find the most profitable combination.
Manufacturing budgets
Budget that plans the expenses a company
undertakes to manufacture its product.
Marketing expense
Expense associated with selling a company’s
product or services.
Master budget
The summary of a company’s departmental
budgets, also known as a consolidated or roll-up budget.
Net income
Revenue remaining after a company has paid
its expenses.
Net present value (NPV)
Sum of the present value of the cash flow
from each future period netted against the original investment.
Operating budget
Projection of the entire income statement
of a company or department.
P&L statement
Statement of a company’s sales, profits,
and expenses.
Payback period
Estimated length of time before a company
will recover an initial investment.
Pro forma statement
A compilation of financial documents that
forecast the future financial health of the company for investors and others
outside the company.
Profit
Amount of money that a company earns after
expenses.
Profit centers
Departments that produce revenue over their
expenses.
Profitability index
Increased value of a future dollar based on
the expected cash in-flows.
Revenue budget
Budget that identifies where the company
will receive the funding for its operation.
Risk-adjusted rate of return
A discount rate that is even higher than
the usual hurdle rate; used to compensate for increased risk.
Risk-free rate of return
The lowest discount rate used in NPV calculations.
Salvage value
Amount of money you can sell the asset for
at the end of its useful life, minus any costs associated with its disposal.
Straight-line method of depreciation
A depreciation method that allocates the
cost of an asset evenly over the course of its life.
Time horizon
Length of time that the budget plans for.
Time value of money
Concept based on the premise that a dollar
received today is valued more highly than a dollar received in the future.
Top-down budgeting
Method in which the highest levels of
management determine departmental budgets.
Uncontrollable costs
Expenses that cannot be influenced with
management strategies for specific circumstances.
Variances
Measurable differences between actual
performance and the budget.
Weighted average cost of capital (WACC)
The return that capital spending must
achieve to satisfy lenders and investors.
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