Financial Terms activity analysis

# Definition of activity analysis

## activity analysis

the process of detailing the various repetitive actions that are performed in making a product or
providing a service, classifying them as value-added and
non-value-added, and devising ways of minimizing or eliminating

# Related Terms:

## Asset activity ratios

Ratios that measure how effectively the firm is managing its assets.

## BARRA's performance analysis (PERFAN)

A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to
evaluate their money managers' performances.

## Break-even analysis

An analysis of the level of sales at which a project would make zero profit.

## Cluster analysis

A statistical technique that identifies clusters of stocks whose returns are highly correlated
within each cluster and relatively uncorrelated between clusters. Cluster analysis has identified groupings
such as growth, cyclical, stable and energy stocks.

## Common-base-year analysis

The representing of accounting information over multiple years as percentages
of amounts in an initial year.
Common-size analysis The representing of balance sheet items as percentages of assets and of income
statement items as percentages of sales.

## Comparative credit analysis

A method of analysis in which a firm is compared to others that have a desired
target debt rating in order to infer an appropriate financial ratio target.

## Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk

## Discriminant analysis

A statistical process that links the probability of default to a specified set of financial ratios.

## Factor analysis

A statistical procedure that seeks to explain a certain phenomenon, such as the return on a
common stock, in terms of the behavior of a set of predictive factors.

## Fundamental analysis

Security analysis that seeks to detect misvalued securities by an analysis of the firm's
business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future
interest rates, and risk evaluation of the firm.

## Horizon analysis

An analysis of returns using total return to assess performance over some investment horizon.

## Horizontal analysis

The process of dividing each expense item of a given year by the same expense item in
the base year. This allows for the exploration of changes in the relative importance of expense items over time
and the behavior of expense items as sales change.

## Mean-variance analysis

Evaluation of risky prospects based on the expected value and variance of possible outcomes.

## Multiple-discriminant analysis (MDA)

Statistical technique for distinguishing between two groups on the
basis of their observed characteristics.

The decomposition of a money manager's performance results to explain
the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What
were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was
market timing statistically significant? And (4), Was security selection statistically significant?

## Pro forma capital structure analysis

A method of analyzing the impact of alternative capital structure
choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will
be able to use projected tax shield benefits fully.

## Regression analysis

A statistical technique that can be used to estimate relationships between variables.

## Scenario analysis

The use of horizon analysis to project bond total returns under different reinvestment rates
and future market yields.

## Sensitivity analysis

analysis of the effect on a project's profitability due to changes in sales, cost, and so on.

## Technical analysis

Security analysis that seeks to detect and interpret patterns in past security prices.

## Vertical analysis

The process of dividing each expense item in the income statement of a given year by net
sales to identify expense items that rise faster or slower than a change in sales.

## VERTICAL ANALYSIS

A financial analysis technique that relates key amounts on the income statement and balance sheet to a 100 percent or base figure for the present and previous year.
It shows the percentage change from last year to this year, making it easier to spot problems that require analysis.

## Activity-based budgeting

A method of budgeting that develops budgets based on expected activities and cost drivers â€“ see also activity-based costing.

## Activity-based costing

A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.

## Allocation base A measure of activity or volume such as labour

hours, machine hours or volume of production
used to apportion overheads to products and
services.

## Costâ€“volumeâ€“profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.

## Ratio analysis

A method of analysing financial reports to interpret trends and make comparisons by using ratios â€“ two numbers, with one generally expressed as a percentage of the other.

## Sensitivity analysis

An approach to understanding how changes in one variable of costâ€“volumeâ€“profit analysis are affected by changes in the other variables.

## Variance analysis

A method of budgetary control that compares actual performance against plan, investigates the causes of the variance and takes corrective action to ensure that targets are achieved.

## Ratio analysis

A method of relating numbers from the various financial statements to one another in order to get meaningful information for comparison.

## activity based costing (ABC)

A relatively new method advocated for the
allocation of indirect costs. The key idea is to classify indirect costs,
many of which are fixed in amount for a period of time, into separate
activities and to develop a measure for each activity called a cost driver.
The products or other functions in the business that benefit from the
activity are allocated shares of the total indirect cost for the period based
on their usage as measured by the cost driver.

## capital investment analysis

Refers to various techniques and procedures
used to determine or to analyze future returns from an investment
of capital in order to evaluate the capital recovery pattern and the
periodic earnings from the investment. The two basic tools for capital
investment analysis are (1) spreadsheet models (which I strongly prefer)
and (2) mathematical equations for calculating the present value or
internal rate of return of an investment. Mathematical methods suffer
from a lack of information that the decision maker ought to consider. A
spreadsheet model supplies all the needed information and has other

## Ratio Analysis

The process of using financial ratios, calculated from key accounts
found in a company's financial statements, to make judgements
concerning the finances and operations of the firm

## activity

a repetitive action performed in fulfillment of business functions

## activity-based budgeting (ABB)

planning approach applying activity drivers to estimate the levels and costs of activities necessary to provide the budgeted quantity and
quality of production

## activity-based costing (ABC)

a process using multiple cost drivers to predict and allocate costs to products and services;
an accounting system collecting financial and operational
data on the basis of the underlying nature and extent
of business activities; an accounting information and
costing system that identifies the various activities performed
in an organization, collects costs on the basis of
the underlying nature and extent of those activities, and
assigns costs to products and services based on consumption
of those activities by the products and services

## activity-based management (ABM)

a discipline that focuses on the activities incurred during the production/performance process as the way to improve the value received
by a customer and the resulting profit achieved by providing
this value

## activity center

a segment of the production or service
process for which management wants to separately report
the costs of the activities performed

## activity driver

a measure of the demands on activities and,
thus, the resources consumed by products and services;
often indicates an activityâ€™s output

an activity that is necessary for the operation of the business but for which a customer would not want to pay

## correlation analysis

an analytical technique that uses statistical
measures of dispersion to reveal the strength of the
relationship between variables

## cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a
project)

## cost driver analysis

the process of investigating, quantifying,
and explaining the relationships of cost drivers and
their related costs

## incremental analysis

a process of evaluating changes that
focuses only on the factors that differ from one course of
action or decision to another

## least squares regression analysis

a statistical technique that investigates the association between dependent and independent variables; it determines the line of "best fit" for a set of observations by minimizing the sum of the squares
of the vertical deviations between actual points and the
regression line; it can be used to determine the fixed and
variable portions of a mixed cost

an activity that increases the time spent on a product or service but that does not increase its worth or value to the customer

## Pareto analysis

a method of ranking the causes of variation
in a process according to the impact on an objective
Pareto inventory analysis an analysis that separates inventory
into three groups based on annual cost-to-volume usage

## sensitivity analysis

a process of determining the amount of change that must occur in a variable before a different decision would be made

an activity that increases the worth of the product or service to the customer

## variance analysis

the process of categorizing the nature (favorable or unfavorable) of the differences between standard and actual costs and determining the reasons for those differences

## Regression analysis

Statistical analysis techniques that quantify the
relationship between two or more variables. The intent is quantitative
prediction or forecasting, particularly using a small population to forecast the
behavior of a large population.

## Activity-based costing (ABC)

A cost allocation system that compiles costs and assigns
them to activities based on relevant activity drivers. The cost of these activities can
then be charged to products or customers to arrive at a much more relevant allocation
of costs than was previously the case.

## Pareto analysis

The 80:20 ratio that states that 20% of the variables included in an
analysis are responsible for 80% of the results. For example, 20% of all customers
are responsible for 80% of all customer service activity, or 20% of all inventory
items comprise 80% of the inventory value.

## break-even analysis

analysis of the level of sales at which the company breaks even.

## credit analysis

Procedure to determine the likelihood a customer will pay its bills.

## scenario analysis

Project analysis given a particular combination of assumptions.

## sensitivity analysis

analysis of the effects of changes in sales, costs, and so on, on project profitability.

## simulation analysis

Estimation of the probabilities of different possible outcomes, e.g., from an investment project.

## Cost-Benefit Analysis

The calculation and comparison of the costs and benefits of a policy or project.

## Failure analysis

The examination of failure incidents to identify components
with poor performance profiles.

## Break-Even Analysis

An analytical technique for studying the relationships between fixed cost, variable cost, and profits. A breakeven chart graphically depicts the nature of breakeven analysis. The breakeven point represents the volume of sales at which total costs equal total revenues (that is, profits equal zero).

## Financial Trend Analysis

Process of analyzing financial statements of a company for any continuing relationship.

## fixed expenses (costs)

Expenses or costs that remain the same in amount,
or fixed, over the short run and do not vary with changes in sales volume
or sales revenue or other measures of business activity. Over the
longer run, however, these costs increase or decrease as the business
grows or declines. Fixed operating costs provide capacity to carry on
operations and make sales. Fixed manufacturing overhead costs provide
production capacity. Fixed expenses are a key pivot point for the analysis
of profit behavior, especially for determining the breakeven point and for
analyzing strategies to improve profit performance.

## attribute-based costing (ABC II)

an extension of activitybased costing using cost-benefit analysis (based on increased customer utility) to choose the product attribute
enhancements that the company wants to integrate into a product