 Financial Terms Variable

# Definition of Variable ## Variable

A value determined within the context of a model. Also called endogenous variable.

# Related Terms:

## Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.

## decision variable

an unknown item for which a linear programming
problem is being solved

## dependent variable

an unknown variable that is to be predicted
using one or more independent variables

## Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .

## Endogenous variable

A value determined within the context of a model.

## Exogenous variable

A variable whose value is determined outside the model in which it is used. Also called
a parameter.

## independent variable

a variable that, when changed, will
cause consistent, observable changes in another variable;
a variable used as the basis of predicting the value of a
dependent variable ## key variable

a critical factor that management believes will
be a direct cause of the achievement or nonachievement
of the organizational goals and objectives

## Normal random variable

A random variable that has a normal probability distribution.

## Random variable

A function that assigns a real number to each and every possible outcome of a random experiment.

## Semi-variable costs

Costs that have both fixed and variable components.

## slack variable

a variable used in a linear programming problem
that represents the unused amount of a resource at
any level of operation; it is associated with less-than-orequal-
to constraints

## surplus variable

a variable used in a linear programming problem that represents overachievement of a minimum requirement; it is associated with greater-than-or-equal-to constraints

## Variable annuities

Annuity contracts in which the issuer pays a periodic amount linked to the investment
performance of an underlying portfolio.

## Variable Annuity

A form of annuity policy under which the amount of each benefit is not guaranteed or specified. The amounts fluctuate according to the earnings of a separate investment account.

## Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero. ## Variable cost

A cost that increases or decreases in proportion with increases or decreases in the volume of production of goods or services.

## variable cost

a cost that varies in total in direct proportion
to changes in activity; it is constant on a per unit basis

## Variable cost

A cost that changes in amount in relation to changes in a related activity.
Variance
The difference between an actual measured result and a basis, such as a budgeted amount.

## variable cost ratio

the proportion of each revenue dollar
represented by variable costs; computed as variable costs
divided by sales or as (1 - contribution margin ratio)

## Variable costing

A method of costing in which only variable production costs are treated as product costs and in which all fixed (production and non-production) costs are treated as period costs.

## variable costing

a cost accumulation and reporting method
that includes only variable production costs (direct material,
direct labor, and variable overhead) as inventoriable
or product costs; it treats fixed overhead as a period cost;
is not acceptable for external reporting and tax returns

## variable costs

Costs that change as the level of output changes.

## VARIABLE EXPENSES

Those that vary with the amount of goods you produce or sell. These may include utility bills, labor, etc.

## variable expenses

Expenses that change with changes in either sales volume
or sales revenue, in contrast to fixed expenses that remain the same
over the short run and do not fluctuate in response to changes in sales
expenses.

## Variable life insurance policy

A whole life insurance policy that provides a death benefit dependent on the
insured's portfolio market value at the time of death. Typically the company invests premiums in common
stocks, and hence variable life policies are referred to as equity-linked policies.

the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity

## Variable price security

A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.

## Variable rate CDs

Short-term certificate of deposits that pay interest periodically on roll dates. On each roll
date, the coupon on the CD is adjusted to reflect current market rates.

## Variable rate loan

Loan made at an interest rate that fluctuates based on a base interest rate such as the
Prime Rate or LIBOR.

## Variable rated demand bond (VRDB)

Floating rate bond that can be sold back periodically to the issuer.

## 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

## Alternative mortgage instruments

Variations of mortgage instruments such as adjustable-rate and variablerate
mortgages, graduated-payment mortgages, reverse-annuity mortgages, and several seldom-used
variations.

## Autocorrelation

The correlation of a variable with itself over successive time intervals.

## Autonomous Expenditure

Elements of spending that do not vary systematically with variables such as GDP that are explained by the theory. See also exogenous expenditure.

## Average inventory

The beginning inventory for a period, plus the amount at the end of
the period, divided by two. It is most commonly used in situations in which just
using the period-end inventory yields highly variable results, due to constant and
large changes in the inventory level.

## balancing item

variable that adjusts to maintain the consistency
of a financial plan. Also called plug.

## 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).

## break-even chart

a graph that depicts the relationships among revenues, variable costs, fixed costs, and profits (or losses)

## 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

## coefficient of correlation

a measure of dispersion that indicates the degree of relative association existing between two variables

## Coefficient of determination

A measure of the goodness of fit of the relationship between the dependent and
independent variables in a regression analysis; for instance, the percentage of variation in the return of an
asset explained by the market portfolio return.

## Contribution

Also the difference between the selling price and variable costs, which can be expressed either per
unit or in total.

## Contribution margin

The difference between variable revenue and variable cost.

## contribution margin

An intermediate measure of profit equal to sales revenue
minus cost-of-goods-sold expense and minus variable operating
expenses—but before fixed operating expenses are deducted. Profit at
this point contributes toward covering fixed operating expenses and
toward interest and income tax expenses. The breakeven point is the
sales volume at which contribution margin just equals total fixed
expenses.

## contribution margin

the difference between selling price and
variable cost per unit or in total for the level of activity; it
indicates the amount of each revenue dollar remaining
after variable costs have been covered and going toward
the coverage of fixed costs and the generation of profits

## Contribution margin

The margin that results when variable production costs are subtracted
from revenue. It is most useful for making incremental pricing decisions
where a company must cover its variable costs, though perhaps not all of its fixed
costs.

## contribution margin ratio

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

## Correlation

The simultaneous change in value of two random numeric variables.

## correlation analysis

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

## Correlation coefficient

A standardized statistical measure of the dependence of two random variables,
defined as the covariance divided by the standard deviations of two variables.

## Correlation Coefficient

A measure of the tendency of two variables to change values
together

## Cost behaviour

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

## cost containment

the practice of minimizing, to the extent
possible, period-by-period increases in per-unit variable
and total fixed costs

## cost structure

the relative composition of an organization’s
fixed and variable costs

## Covariance

A statistical measure of the degree to which random variables move together.

## Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

## Current Dollars

A variable like GDP is measured in current dollars if each year's value is measured in prices prevailing during that year. In contrast, when measured in real or constant dollars, each year's value is measured in a base year's prices.

## direct costing

see variable costing

## Direct materials mix variance

The variance between the budgeted and actual mixes of
direct materials costs, both using the actual total quantity used. This variance isolates
the unit cost of each item, excluding all other variables.

Related: variable life

## Exogenous

An adjective indicating that something is determined by forces unrelated to the theory determining the variables under investigation.

## Expected Value

The value of the possible outcomes of a variable weighted by the
probabilities of each outcome

## Floating-rate contract

A guaranteed investment contract where the credit rating is tied to some variable
("floating") interest rate benchmark, such as a specific-maturity Treasury yield.

## gross margin, or gross profit

This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. Gross margin is a key variable in management
profit reports for decision making and control. Gross margin
doesn’t apply to service businesses that don’t sell products.

## high-low method

a technique used to determine the fixed
and variable portions of a mixed cost; it uses only the highest
and lowest levels of activity within the relevant range

## input-output coefficient

a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource

## integer programming

a mathematical programming technique in which all solutions for variables must be restricted to whole numbers

## Interest rate swap

A binding agreement between counterparties to exchange periodic interest payments on
some predetermined dollar principal, which is called the notional principal amount. For example, one party
will pay fixed and receive variable.

## Inverse floating rate note

A variable rate security whose coupon rate increases as a benchmark interest rate declines.

## Lag

Payment of a financial obligation later than is expected or required, as in lead and lag. Also, the number
of periods that an independent variable in a regression model is "held back" in order to predict the dependent
variable.

A variable that reaches a turning point (a peak or a trough) before the economy reaches a turning point.

## 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

## LIBOR

The London Interbank Offered Rate; the rate of interest that major international banks in London
charge each other for borrowings. Many variable interest rates in the U.S. are based on spreads off of LIBOR.
There are many different LIBOR tenors.

## linear programming

a method of mathematical programming used to solve a problem that involves an objective function and multiple limiting factors or constraints long-term variable cost a cost that was traditionally viewed as a fixed cost

## Log-linear least-squares method

A statistical technique for fitting a curve to a set of data points. One of the
variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data
points.

## Lognormal distribution

A distribution where the logarithm of the variable follows a normal distribution.
Lognormal distributions are used to describe returns calculated over periods of a year or more.

## Long run

A period of time in which all costs are variable; greater than one year.
Long straddle A straddle in which a long position is taken in both a put and call option.

## Long run

A period of time in which all costs are variable; greater than one year.

## Mean

The expected value of a random variable.

## Measurement error

Errors in measuring an explanatory variable in a regression that leads to biases in
estimated parameters.

## mixed cost

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

## Moving average

Used in charts and technical analysis, the average of security or commodity prices
constructed in a period as short as a few days or as Long as several years and showing trends for the latest
interval. As each new variable is included in calculating the average, the last variable of the series is deleted.

## Multiple regression

The estimated relationship between a dependent variable and more than one explanatory variable.

## multiple regression

a statistical technique that uses two or
more independent variables to predict a dependent variable

## Multiplier

Change in the equilibrium value of a variable of interest per change in a variable over which one has control. "The" multiplier is the change in equilibrium income per change in government spending.

## Neutrality of Money

The doctrine that the money supply affects only the price level, with no long-run impact on real variables.

## Normal (bell-shaped) distribution

In statistics, a theoretical frequency
distribution for a set of variable data, usually represented by a bell-shaped

## Normal probability distribution

A probability distribution for a continuous random variable that is forms a
symmetrical bell-shaped curve around the mean.

## operating leverage

the proportionate relationship between
a company’s variable and fixed costs

## Optimum selling price

The price at which profit is maximized, which takes into account the cost behaviour of fixed and variable costs and the relationship between price and demand for a product/service.

## ordering cost

the variable cost associated with preparing,
receiving, and paying for an order

## Ordinary least squares (OLS)

regression analysis a statistical technique that minimizes the sum of the squared deviations between a dependent variable and one or more independent variables and provides the user
with a y-intercept and x-coefficients, as well as feedback such as R2 (explained
variation/total variation) t-statistics, p-values, etc.

Overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.

the difference between total budgeted overhead at actual hours and total budgeted
overhead at standard hours allowed for the production
achieved; it is computed as part of a three-variance analysis;
it is the same as variable overhead efficiency variance

the difference between total actual overhead and total budgeted overhead at actual
hours; it is computed as part of three-variance analysis; it
is equal to the sum of the variable and fixed overhead
spending variances

## Parameter

A representation that characterizes a part of a model (e.g. a growth rate), the value of which is
determined outside of the model. See: exogenous variable.