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Cost-benefit ratio

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Definition of Cost-benefit ratio

Cost-benefit Ratio Image 1

Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.



Related Terms:

"Soft" Capital Rationing

Capital rationing that under certain circumstances can be violated or even viewed
as made up of targets rather than absolute constraints.


Absorption costing

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.


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


Absorption costing

A methodology under which all manufacturing costs are assigned
to products, while all non-manufacturing costs are expensed in the current period.


Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.



Acceleration Clause

Clause causing repayment of a debt, if specified events occur or are not met.


Accelerationist Hypothesis

Belief that an effort to keep unemployment below its natural rate results in an accelerating inflation.


Cost-benefit Ratio Image 2

Accidental Death Benefit (ADB)

Coverage against accidental death usually payable in addition to base amount of coverage.


accounts receivable turnover ratio

A ratio computed by dividing annual
sales revenue by the year-end balance of accounts receivable. Technically
speaking, to calculate this ratio the amount of annual credit sales should
be divided by the average accounts receivable balance, but this information
is not readily available from external financial statements. For
reporting internally to managers, this ratio should be refined and finetuned
to be as accurate as possible.


Accumulated Benefit Obligation (ABO)

An approximate measure of the liability of a plan in the event of a
termination at the date the calculation is performed. Related: projected benefit obligation.


Acid-test ratio

Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid
items to current liabilities.


ACID-TEST RATIO

A ratio that shows how well a company could pay its current debts using only its most liquid or “quick” assets. It’s a more pessimistic—but also realistic—measure of safety than the current ratio, because it ignores sluggish, hard-toliquidate current assets like inventory and notes receivable. Here’s the formula:
(Cash + Accounts receivable + Marketable securities) / (Current liabilities)


Acid-test Ratio

See quick ratio


acid test ratio (also called the quick ratio)

The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.


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.


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.


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 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.



Actual cost

The actual expenditure made to acquire an asset, which includes the supplierinvoiced
expense, plus the costs to deliver and set up the asset.


actual cost system

a valuation method that uses actual direct
material, direct labor, and overhead charges in determining
the cost of Work in Process Inventory


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.


Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.


Agency costs

The incremental costs of having an agent make decisions for a principal.


Aggressive Cost Capitalization

cost capitalization that stretches the flexibility within generally
accepted accounting principles beyond its intended limits, resulting in reporting as assets
items that more reasonably should have been expensed. The purpose of this activity is likely to
alter financial results and financial position in order to create a potentially misleading impression
of a firm's business performance or financial position.


All-in cost

Total costs, explicit and implicit.


Amortized Cost

cost of a security adjusted for the amortization of any purchase premium or
discount.


appraisal cost

a quality control cost incurred for monitoring
or inspection; compensates for mistakes not eliminated
through prevention activities


Appraisal ratio

The signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual standard
deviation.



Articles of incorporation

Legal document establishing a corporation and its structure and purpose.


Asset activity ratios

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


Asset/equity ratio

The ratio of total assets to stockholder equity.


asset turnover ratio

A broad-gauge ratio computed by dividing annual
sales revenue by total assets. It is a rough measure of the sales-generating
power of assets. The idea is that assets are used to make sales, and the
sales should lead to profit. The ultimate test is not sales revenue on
assets, but the profit earned on assets as measured by the return on
assets (ROA) ratio.


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


Automatic Benefits Payment

Automatic payment of moneys derived from a benefit.


Average-Cost Inventory Method

The inventory cost-flow assumption that assigns the average
cost of beginning inventory and inventory purchases during a period to cost of goods sold and
ending inventory.


Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.


Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.


backflush costing

a streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires
few allocations, uses standard costs, and has minimal variances
from standard


Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.


Basic Earnings Power Ratio

Percentage of earnings relative to total assets; indication of how
effectively assets are used to generate earnings. It is calculated by
dividing earnings before interest and taxes by the book value of all
assets.


Batch cost

A cost that is incurred when a group of products or services are produced,
and which cannot be identified to specific products or services within each group.


batch-level cost

a cost that is caused by a group of things
being made, handled, or processed at a single time


Benefit

An instruction that pays a cash amount upon the occurrence of a specific event.


Benefit Ratio Method

The proportion of unemployment benefits paid to a company’s
former employees during the measurement period, divided by the total
payroll during the period. This calculation is used by states to determine the unemployment
contribution rate to charge employers.


Benefit Value

The amount of cash payable on a benefit.


Benefit Wage Ratio Method

The proportion of total taxable wages for laid off
employees during the measurement period divided by the total payroll during
the period. This calculation is used by states to determine the unemployment
contribution rate to charge employers.


benefits-provided ranking

a listing of service departments in an order that begins with the one providing the most service
to all other corporate areas; the ranking ends with the
service department providing service primarily to revenueproducing
areas


budgeted cost

a planned expenditure


cafeteria plan a “menu” of fringe benefit options that include

cash or nontaxable benefits


Canadian Deposit Insurance Corporation

Better known as CDIC, this is an organization which insures qualifying deposits and GICs at savings institutions, mainly banks and trust companys, which belong to the CDIC for amounts up to $60,000 and for terms of up to five years. Many types of deposits are not insured, such as mortgage-backed deposits, annuities of duration of more than five years, and mutual funds.


Capital Cost Allowance (CCA)

The annual depreciation expense allowed by the Canadian Income Tax Act.


Capital rationing

Placing one or more limits on the amount of new investment undertaken by a firm, either
by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital
budget.


capital rationing

a condition that exists when there is an
upper-dollar constraint on the amount of capital available
to commit to capital asset acquisition


capital rationing

Limit set on the amount of funds available for investment.


capitalization of costs

When a cost is recorded originally as an increase
to an asset account, it is said to be capitalized. This means that the outlay
is treated as a capital expenditure, which becomes part of the total
cost basis of the asset. The alternative is to record the cost as an expense
immediately in the period the cost is incurred. Capitalized costs refer
mainly to costs that are recorded in the long-term operating assets of a
business, such as buildings, machines, equipment, tools, and so on.


Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.


Capitalized Cost An expenditure or accrual that is reported as an asset to be amortized against

future-period revenue.


Carring costs

costs that increase with increases in the level of investment in current assets.


carrying cost

the total variable cost of carrying one unit of
inventory in stock for one year; includes the opportunity
cost of the capital invested in inventory


Carrying cost

The cost of holding inventory, which can include insurance,
spoilage, rent, and other expenses.


carrying costs

costs of maintaining current assets, including opportunity cost of capital.


Cash cost

The amount of cash expended.


Cash flow coverage ratio

The number of times that financial obligations (for interest, principal payments,
preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental
payments, and depreciation.


Cash flow from operations

A firm's net cash inflow resulting directly from its regular operations
(disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing
securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net
income.


Cash Flow–to–Income Ratio (CFI)

Adjusted cash flow provided by continuing operations
divided by adjusted income from continuing operations.


CASH FLOWS FROM OPERATIONS

A section on the cash-flow Stockholders’ equity statement that shows how much cash came into a company and how much went out during the normal course of business.


Cash ratio

The proportion of a firm's assets held as cash.


Cash Ratio

ratio of cash and cash equivalents to liabilities; in the case of a bank, the ratio of cash to total deposit liabilities.


committed cost

a cost related either to the long-term investment
in plant and equipment of a business or to the
organizational personnel whom top management deem
permanent; a cost that cannot be changed without longrun
detriment to the organization


Common stock ratios

ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.


company cost of capital

Expected rate of return demanded by investors in a company, determined by the average risk of the company’s assets and operations.


Concentration account

A single centralized account into which funds collected at regional locations
(lockboxes) are transferred.


concentration banking

System whereby customers make payments to a regional collection center which transfers funds to
a principal bank.


Concentration services

Movement of cash from different lockbox locations into a single concentration
account from which disbursements and investments are made.


Configuration audit

A review of all engineering documentation used as the basis
for a manufactured product to see if the documentation accurately represents
the finished product.


Configuration control

Verifying that a delivered product matches authorizing
engineering documentation. This also refers to engineering changes made subsequent
to the initial product release.


contribution margin ratio

the proportion of each revenue dollar remaining after variable costs have been covered;
computed as contribution margin divided by sales


controllable cost

a cost over which a manager has the ability to authorize incurrence or directly influence magnitude


Controlled foreign corporation (CFC)

A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.


conversion cost

Refers to the sum of manufacturing direct labor and overhead
costs of products. The cost of raw materials used to make products
is not included in this concept. Generally speaking, this is a rough measure
of the value added by the manufacturing process.


conversion cost

the total of direct labor and overhead cost;
the cost necessary to transform direct material into a finished good or service


Conversion ratio

The number of shares of common stock that the security holder will receive from
exercising the call option of a convertible security.


Corporation

A legal "person" that is separate and distinct from its owners. A corporation is allowed to own
assets, incur liabilities, and sell securities, among other things.


Corporation

A legal entity, organized under state laws, whose investors purchase
shares of stock as evidence of ownership in it. A corporation is a legal entity, which
eliminates much of the liability for the corporation’s actions from its investors.


corporation

Business owned by stockholders who are not personally
liable for the business’s liabilities.


Cost

A resource sacrificed or forgone to achieve a specific objective (Horngren et al.), defined
typically in monetary terms.


cost

the cash or cash equivalent value necessary to attain an
objective such as acquiring goods and services, complying
with a contract, performing a function, or producing and
distributing a product


Cost

The expense incurred to create and sell a product or service. If a product is not
sold, then it is recorded as an asset, whereas the sale of a product or service will
result in the recording of all related costs as an expense.


cost accounting

a discipline that focuses on techniques or
methods for determining the cost of a project, process, or
thing through direct measurement, arbitrary assignment, or
systematic and rational allocation


Cost Accounting Standards Board (CASB)

a body established by Congress in 1970 to promulgate cost accounting
standards for defense contractors and federal agencies; disbanded
in 1980 and reestablished in 1988; it previously issued
pronouncements still carry the weight of law for those
organizations within its jurisdiction


cost accumulation

the approach to product costing that determines
which manufacturing costs are recorded as part
of product cost


cost allocation

the assignment, using some reasonable basis,
of any indirect cost to one or more cost objects


cost avoidance

the practice of finding acceptable alternatives
to high-cost items and/or not spending money for
unnecessary goods or services


Cost basis

An asset’s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.


Cost behaviour

The idea that fixed costs and variable costs react differently to changes in the volume of
products/services produced.


Cost-Benefit Analysis

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


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 center

a responsibility center in which the manager has
the authority to incur costs and is evaluated on the basis
of how well costs are controlled


Cost centre

A division or unit of an organization that is responsible for controlling costs.



 

 

 

 

 

 

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