Comprehensive Financial and Cost Analysis: Regression, Budgeting, Pricing, and Capital Investment

Correlation

Given variable tends to change predictably in the same (or opposite) direction of a given change in the other variable.

Cost estimation

The development of a well-defined relationship between a cost object and its cost drivers for the purpose of predicting the cost.

Dependent Variable

The cost to be estimated.

Independent Variable

The cost driver used to estimate the value of the independent variable.

Dummy Variable

Represents the presence or absence of a condition.

Mean absolute percentage error

Calculated by taking the absolute value of each error and then averaging those errors.

Nonlinearity

Most often happens because of certain time-series patterns to the data such as trend and/or seasonality, an outlier in the data, or data shift.

Outliers

Data points that seem to fall far outside the pattern formed by the rest of the data.

p-value

Measures the risk that a particular independent variable has only a chance relationship to the dependent variable.

R-squared

A number between zero and one; often described as a measure of the explanatory power of the regression; the degree to which changes in the dependent variable can be explained by changes in the independent variable.

Residuals

Difference between actual cost and predicted cost (error of the model).

Relevant range

The range of the cost driver in which the actual value of the cost driver is expected to fall.

High-low method

A method using algebra to determine a unique cost estimation line between representative high and low points in a given data set.

Simple linear regression

Used to describe regression applications having a single independent variable.

Multiple regression

Used to describe regression applications having two or more independent variables.

Standard error of estimates

A measure of the dispersion of the actual observations around the regression line.

CVP analysis

A short-term profit-planning model; a method for analyzing how various operating decisions and marketing decisions will affect short-term profit.

Breakeven point

The point at which total revenues equal total costs so that operating profit is zero.

Contribution margin

The difference between the selling price per unit and the variable cost per unit.

Contribution margin ratio

The ratio of the contribution margin per unit to the selling price per unit.

Indifference point

Activity level where two alternatives have equal total cost or profit.

Operating leverage

The extent of fixed costs in an organization's cost structure.

Degree of operating leverage

A measure of the sensitivity of operating profit to changes in volume.

Margin of safety

The amount of planned (or actual) sales above the breakeven point.

Margin of safety ratio

The margin of safety divided by breakeven sales.

Weighted average contribution margin

An average per-unit contribution margin based on an assumed sales mix.

Budget

A detailed plan for the acquisition and use of financial and other resources over a specified period of time.

Master budget

An aggregation of all subunit budgets into an integrated plan of action for the budget period.

Capital budget

A process of identifying, evaluating, selecting, and controlling an organization's capital investments.

Operating budget

Plans for all phases of operation, including production, purchasing, personnel, and marketing budgets.

Financial budget

Budgets that identify and relate to sources and uses of funds for planned operations and capital expenditures.

Sales budget

A schedule showing forecasted sales, in units and dollars, for an upcoming period.

Production budget

A budget showing planned output for an upcoming period.

Direct materials usage budget

A plan that shows the amount and budgeted cost of direct materials required for planned production.

Direct materials purchases budget

A budget that shows the physical amount and cost of planned purchases of direct materials.

Pro forma income statement

Describes the expected net income for an upcoming period.

Pro forma balance sheet

A projected balance sheet based on the budgeted data.

Budgetary slack

The difference between budgeted performance and expected performance.

Spending the budget

Using up the entire budget to avoid losing it in the future.

Goal congruence

The consistency among the goals of the firm, its subunits, and its employees.

Relevant costs

A future cost that differs between and among decision alternatives.

Opportunity costs

The benefit lost choosing one option precludes receiving the benefits from an alternative option.

Sunk costs

Costs that have been incurred in the past or committed for the future.

Special order

A one-time order at a different (usually lower) price than normal.

Product line

A group of related products sold by a company.

Cost-based pricing

Describes when a price is set largely by the cost incurred to develop and provide the given product or service.

Market-based pricing

Determines a price based on how other products in the market are priced.

Value-based pricing

Practice of setting a price based on the consumer's willingness to pay.

Target costing

Tool for analyzing the cost structure to help management identify the proper design features.

Value engineering

Used in target costing to reduce product cost by analyzing trade-offs.

Life-cycle pricing

Provides a long-term perspective as it considers the entire cost-life cycle of the product.

Sales life cycle

The sequence of phases in a product's or service's life in the market.

Skimming

Setting an initial high price for those willing to pay.

Penetration pricing

Setting a low initial price to quickly gain market share.

Accounting rate of return

A rate of return on a project measured as the ratio of accounting profit to investment.

Capital investments

A project that involves a large up-front expenditure of funds.

Discount rate

A term that refers to the rate used for converting estimated future cash flows.

Discounted cash flow models

Capital budgeting decision models that incorporate the present value of future cash flows.

Time value of money

Money today is worth more than the same amount in the future.

Internal rate of return

An estimate of the true rate of return on a proposed investment.

Net present value

The difference between the present value of future cash inflows and outflows.

Net working capital

Current assets other than cash less current liabilities.

Non-discounted cash flow models

Capital budgeting decision models that are not based on present value analysis.

Payback period

The length of time required for the cumulative cash inflows from an investment to recover the initial investment.

Present value

Future cash flows expressed in terms of current purchasing power.

Project initiation

To acquire the investment and begin operations.

Project operation

To cover operating expenditures and additional investments.

Project disposal

To dispose of the investment and restore facilities.

Weighted-average cost of capital

An average of a firm's (after-tax) cost of debt and equity capital.