Key Terms and Glossary

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Common fixed cost: A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments.

Cost centre: A business segment whose manager has control over cost but has no control over revenue or the use of investment funds.

Decentralized organization: An organization in which decision making is not confined to a few top executives but rather is spread throughout the organization.

Economic value added (EVA): A concept similar to residual income.

Intermediate market: A market in which a transferred product or service is sold in its present form to outside customers.

Investment centre: A business segment whose manager has control over cost and over revenue and that also has control over the use of investment funds.

Life cycle costing: A costing approach that focuses on all costs along the value chain that will be generated throughout the entire life of a product.

Margin: Net operating income divided by sales.

Market price: The price being charged for an item on the open (intermediate) market.

Market share variance: A measure of actual sales volume minus the anticipated portion of the actual market volume, multiplied by the budgeted contribution margin per unit.

Market volume variance: A measure of actual market volume minus budget market volume times anticipated market share, multiplied by the budgeted contribution margin.

Negotiated transfer price: A transfer price agreed on between buying and selling divisions.

Net operating income: Income before interest and income taxes have been deducted.

Operating assets: Cash, accounts receivable, inventory, plant and equipment, and all other assets held for productive use in an organization.

Profit centre: A business segment whose manager has control over cost and revenue but has no control over the use of investment funds.

Range of acceptable transfer prices: The range of transfer prices within which the profits of both the selling division and the purchasing division would increase as a result of a transfer.

Residual income: The net operating income that an investment centre earns above the required return on its operating assets.

Responsibility centre: Any business segment whose manager has control over cost, revenue, or the use of investment funds.

Return on investment (ROI): Net operating income divided by average operating assets. It also equals margin multiplied by turnover.

Sales mix variance: A measure of actual sales quantity minus actual sales quantity based on the budgeted mix, multiplied by the budgeted sales price.

Sales price variance: A measure of actual sales price minus the budgeted sales price, multiplied by the actual sales quantity.

Sales quantity variance: A measure of actual sales quantity based on budgeted mix minus the budgeted sales quantity, multiplied by the budgeted sales price.

Segment: Any part of an organization that can be evaluated independently of other parts and about which the manager seeks financial data. Examples include a product line, a sales territory, a division, or a department.

Segment margin: The amount computed by deducting the traceable fixed costs of a segment from the segment's contribution margin. It represents the margin available after a segment has covered all of its own costs.

Suboptimization: An overall level of profitability that is less than a segment or a company is capable of earning.

Traceable fixed cost: A fixed cost that is incurred because of the existence of a particular business segment.

Transfer price: The price charged when one division or segment provides goods or services to another division or segment of an organization.

Turnover: The amount of sales generated in an investment centre for each dollar invested in operating assets. It is computed by dividing sales by the average operating assets figure.

Value chain: The major business functions that add value to a company's products and services. These functions consist of research and development, product design, manufacturing, marketing, distribution, and customer service.