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Definition of Component

Component Image 1


Raw materials or subassemblies used to make either finished goods
or higher levels of subassembly.

Related Terms:

economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

absorption costing

a cost accumulation and reporting
method that treats the costs of all manufacturing components
(direct material, direct labor, variable overhead, and
fixed overhead) as inventoriable or product costs; it is the
traditional approach to product costing; it must be used for
external financial statements and tax returns

Accumulation bin

A location in which components destined for the shop floor are
accumulated before delivery.

Adjusted Cash Flow Provided by Continuing Operations

Cash flow provided by operating
activities adjusted to provide a more recurring, sustainable measure. Adjustments to reported cash
provided by operating activities are made to remove such nonrecurring cash items as: the operating
component of discontinued operations, income taxes on items classified as investing or financing activities, income tax benefits from nonqualified employee stock options, the cash effects of purchases and sales of trading securities for nonfinancial firms, capitalized expenditures, and other nonrecurring cash inflows and outflows.

Annual Premium

Yearly amount payable by a client for a policy or component.


An arithmetic mean of selected stocks intended to represent the behavior of the market or some
component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the
current prices of the 30 DJIA's stocks, and divides the results by a predetermined number, the divisor.

bill of materials

a document that contains information about
the product materials components and their specifications
(including quality and quantities needed)

Component Image 2

contract manufacturer

an external party that has been granted an outsourcing contract to produce a part or component for an entity

Cost of Common Stock

The rate of return required by the investors in the common stock of
the company. A component of the cost of capital.

Cost of Debt

The cost of debt (bonds, loans, etc.) that a company is charged for
borrowing funds. A component of the cost of capital.

Cost of goods sold

The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
materials, components, labor and other things that went into producing an item.

Cost of Preferred Stock

The rate of return required by the investors in the preferred stock of
a company. A component of the cost of capital.

Counterpart items

In the balance of payments, counterpart items are analogous to unrequited transfers in the
current account. They arise because the double-entry system in balance of payments accounting and refer to
adjustments in reserves owing to monetization or demonetization of gold, allocation or cancellation of SDRs,
and revaluation of the various components of total reserves.

Deferred equity

A common term for convertible bonds because of their equity component and the
expectation that the bond will ultimately be converted into shares of common stock.

Du Pont system

A breakdown of ROE and ROA into component ratios.

Exante return

The expected return of a portfolio based on the expected returns of its component assets and
their weights.


The multiplication of component requirements itemized on a bill of material
by the number of parent items required to determine total parts usage.

Failure analysis

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

Indented bill of material

A bill of material reporting format under which successively
lower levels of components are indented farther away from the left

Item master file

A file containing all item-specific information about a component,
such as its weight, cubic volume, and unit of measure.

Item number

A number uniquely identifying a product or component.

just-in-time manufacturing system

a production system that attempts to acquire components and produce inventory only as needed, to minimize product defects, and to
reduce lead/setup times for acquisition and production


the Japanese word for card; it was the original name
for a JIT system because of the use of cards that indicated
a work center’s need for additional components during a manufacturing process


A group of components needed to assemble a finished product that has been
clustered together for delivery to the shop floor.

Level pay

The characteristic of the scheduled principal and interest payments due under a mortgage such that
total monthly payment of P&I is the same while characteristically the principal payment component of the
monthly payment becomes gradually greater while the monthly interest payment becomes less.

make-or-buy decision

a decision that compares the cost of
internally manufacturing a component of a final product
(or providing a service function) with the cost of purchasing
it from outside suppliers (outsourcing) or from another
division of the company at a specified transfer price

Margin call

A demand for additional funds because of adverse price movement. Maintenance margin
requirement, security deposit maintenance
Margin of safety With respect to working capital management, the difference between 1) the amount of longterm
financing, and 2) the sum of fixed assets and the permanent component of current assets.

mass customization

personalized production generally accomplished
through the use of flexible manufacturing systems;
it reflects an organization’s increase in product variety
from the same basic component elements

Matrix bill of material

A bill of materials chart listing the bills for similar products,
which is useful for determining common components.


The value of the products that a retailing or wholesaling company intends to resell for a profit.
In a manufacturing business, inventories would include finished goods, goods in process, raw materials, and parts and components that will go into the end product.

mixed cost

a cost that has both a variable and a fixed component;
it varies with changes in activity, but not proportionately

Modular bill of material

A bill of material format in which components and subassemblies
are clustered by product option, so one can more easily plan for the
assembly of finished goods with different configurations.

Multilevel bill of material

An itemization of all bill of material components, including
a nested categorization of all components used for subassemblies.

Outright rate

Actual forward rate expressed in dollars per currency unit, or vice versa.
he practice of purchasing a significant percentage of intermediate components from outside suppliers.


the use, by one company, of an external
provider of a service or manufacturer of a component


A specific component of a larger assembly.

Part number

A number uniquely identifying a product or component.

process costing system

a method of accumulating and assigning costs to units of production in companies producing large quantities of homogeneous products;
it accumulates costs by cost component in each production department and assigns costs to units using equivalent units of production

product complexity

an assessment about the number of components in a product

Quick asset

Any asset that can be converted into cash on short notice. This is a subset
of a current asset, for it does not include inventory. Its most common components
are the cash, marketable securities, and accounts receivable accounts.

Raw materials inventory

The total cost of all component parts currently in stock that
have not yet been used in work-in-process or finished goods production.

Requirements explosion

The component-level requirements for a production run,
derived by multiplying the number of parent-level requirements by the component
requirements for each parent, as specified in the bill of materials.


a graph that plots all known activity observations
and the associated costs; it is used to separate mixed
costs into their variable and fixed components and to examine
patterns reflected by the plotted observations

Semi-variable costs

Costs that have both fixed and variable components.

Shelf life control

Deliberate usage of the oldest items first, in order to avoid exceeding
a component or product’s shelf life.

Single-level bill of material

A list of all components used in a parent item.

Stripped mortgage-backed securities (SMBSs)

Securities that redistribute the cash flows from the
underlying generic MBS collateral into the principal and interest components of the MBS to enhance their use
in meeting special needs of investors.

Structured Settlement

Historically, damages paid out during settlement of personal physical injury cases were distributed in the form of a lump-sum cash payment to the plaintiff. This windfall was intended to provide for a lifetime of medical and income needs. The claimant or his/her family was then forced into the position of becoming the manager of a large sum of money.
In an effort to create a more financially stable arrangement for the claimant, the Structured Settlement was developed. A Structured Settlement is an alternative to a lump sum cash payment in the resolution of personal physical injury, wrongful death, or workers’ compensation cases. The settlement usually consists of two components: an up-front cash payment to provide for immediate needs and a series of future periodic payments which are funded by the defendant’s purchase of one or more annuity policies. Those payors make payments directly to the claimant. In the unfortunate event of the claimant’s death, a guaranteed portion of the settlement may be directed to a beneficiary or his/her estate.
A Structured Settlement is a guaranteed source of funds paid to the claimant or his/her family on a tax-free basis.


A group of assembled components used in the assembly of a higherlevel

Summarized bill of materials

A bill of materials format showing the grand total
usage requirement for each component of a finished product.

Term life insurance

A contract that provides a death benefit but no cash build-up or investment component.
The premium remains constant only for a specified term of years, and the policy is usually renewable at the
end of each term.

Time value of an option

The portion of an option's premium that is based on the amount of time remaining
until the expiration date of the option contract, and that the underlying components that determine the value of
the option may change during that time. Time value is generally equal to the difference between the premium
and the intrinsic value. Related: in-the-money.


The ability to track the components used in production through their
inclusion in a finished product and from there to specific customers.

transfer time

the time consumed by moving products or
components from one place to another

Universal life

A whole life insurance product whose investment component pays a competitive interest rate
rather than the below-market crediting rate.

Universal Life

An unbundled Life product with a separate investment component. It typically does not participate in companies profits.

Weighted Average Cost of Capital (WACC)

The weighted average of the costs of the capital components
(debt, preferred stock, and common stock)

Weighted Average Cost of Capital (WACC)

A weighted average of the component costs of debt, preferred shares, and common equity. Also called the composite cost of capital.

Where-used report

A report listing every product whose bill of material calls for
the use of a specific component.

Whole Life

component that provides life coverage during the insured's life.

Whole life insurance

A contract with both insurance and investment components: (1) It pays off a stated
amount upon the death of the insured, and (2) it accumulates a cash value that the policyholder can redeem or
borrow against.

Working Capital Cash

The cash component of working capital.

Zero-investment portfolio

A portfolio of zero net value established by buying and shorting component
securities, usually in the context of an arbitrage strategy.







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