Accounting

Raw materials inventory

The account that includes the cost of all raw materials on hand that are used for production.

Work in process inventory

The account that includes the cost of products that are not yet completed, including materials, labor, and overhead.

Finished goods inventory

The account that reflects the cost of completed products that are ready for sale.

Inventory expense recognition

Inventory is recorded as an expense when the product it is on is sold.

Contribution margin income statement

A financial statement that shows the sales revenue minus variable costs to determine the contribution margin.

Breakeven point

The level of sales at which total sales equals variable costs plus fixed costs.

Sunk cost

A cost that has already been incurred and cannot be recovered; considered irrelevant for future business decisions.

Decentralization

The process of granting division-level managers authority and responsibility by top management.

Margin of Safety

The amount of actual or expected units sold minus the number of units needed to breakeven.

Return on Investment (ROI)

A performance measure used to evaluate the efficiency of an investment or compare the efficiency of several investments.

Residual Income (RI)

The profit leftover after all costs of capital used to generate revenues have been deducted.

Contribution margin

The difference between sales and variable costs, indicating the portion of sales that helps to cover fixed costs.

Variable costs

Costs that vary in total directly and proportionately with changes in activity.

Fixed costs

Costs that remain constant in total regardless of the level of activity.

Property taxes

A fixed cost associated with owning property, typically incurred regardless of production levels.

Electricity used in the factory

A type of manufacturing overhead cost that varies with the level of production.

Net Income

The total revenue minus total expenses, representing the profit of a company.

Sales Price Per Unit

The amount charged to customers for each unit of a product sold.

Direct labor

The hourly wages paid to workers directly involved in the manufacturing process.

Total Product Costs

The sum of direct materials, direct labor, and manufacturing overhead incurred to produce products.

Operating Expenses

Costs that are involved in the day-to-day running of a business, excluding the cost of goods sold.

Multi-Step Income Statement

A detailed income statement that focuses on separating operational revenues and expenses from non-operational ones