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.

## 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.

## 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.

## Variable annuities

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

## 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 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.

## 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 rated demand bond (VRDB)

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

## 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 EXPENSES

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

## Semi-variable costs

Costs that have both fixed and variable components.

## Variable cost

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

## 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 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.

## 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

## 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

## 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 cost

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

## 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 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)

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 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 costs

Costs that change as the level of output changes.

## 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.

## 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.

## 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.

## 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 margin

The difference between variable revenue and variable cost.

## 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.

## 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.

Related: variable life

## 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.

## 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.

## 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.

## 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.

## 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.

## Normal probability distribution

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

## 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.

## Plug

A variable that handles financial slack in the financial plan.

## Probability density function

The probability function for a continuous random variable.

## Probability distribution

Also called a probability function, a function that describes all the values that the random variable can
take and the probability associated with each.

## R squared (R^2)

Square of the correlation coefficient proportion of the variability explained by the linear
regression model. For example, an r squared of 75% means that 75% of the variability observed in the
dependent variable is explained by the independent variable.

## Regression analysis

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

## Regression equation

An equation that describes the average relationship between a dependent variable and a
set of explanatory variables.

## Regression toward the mean

The tendency for subsequent observations of a random variable to be closer to its mean.

## Residuals

1) Parts of stock returns not explained by the explanatory variable (the market-index return). They
measure the impact of firm-specific events during a particular period.
2) Remainder cash flows generated by pool collateral and those needed to fund bonds supported by the collateral.

## Serial covariance

The covariance between a variable and the lagged value of the variable; the same as
autocovariance.

## Simple linear regression

A regression analysis between only two variables, one dependent and the other explanatory.

## Tactical Asset Allocation (TAA)

An asset allocation strategy that allows active departures from the normal
asset mix based upon rigorous objective measures of value. Often called active management. It involves
forecasting asset returns, volatilities and correlations. The forecasted variables may be functions of
fundamental variables, economic variables or even technical variables.

## Technical descriptors

variables that are used to describe the market on a technical basis.

## Volatility

A measure of risk based on the standard deviation of investment fund performance over 3 years.
Scale is 1-9; higher rating indicates higher risk. Also, the standard deviation of changes in the logarithm of an
asset price, expressed as a yearly rate. Also, volatility is a variable that appears in option pricing formulas. In
the option pricing formula, it denotes the volatility of the underlying asset return from now to the expiration
of the option.
Std Deviation = Rating
up to 7.99 = 1
8.00-10.99 = 2
11.00-13.99 = 3
14.00-16.99 = 4
17.00-19.99 = 5
20.00-22.99 = 6
23.00-25.99 = 7
26.00-28.99 = 8
29.00 and up = 9

## Absorption costing

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

## Contribution

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

## Cost behaviour

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

## 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.

## Sensitivity analysis

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

## contribution margin

An intermediate measure of profit equal to sales revenue
minus cost-of-goods-sold expense and minus variable operating
expensesâ€”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.

## 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
doesnâ€™t apply to service businesses that donâ€™t sell products.

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.

## revenue-driven expenses

Operating expenses that vary in proportion to
changes in total sales revenue (total dollars of sales). Examples are sales
commissions based on sales revenue, credit card discount expenses, and
rents and franchise fees based on sales revenue. These expenses are one
of the key variables in a profit model. Segregating these expenses from
other types of expenses that behave differently is essential for management
decision-making analysis. (These expenses are not disclosed separately
in externally reported income statements.)

## unit margin

The profit per unit sold of a product after deducting product
cost and variable expenses of selling the product from the sales price of
the product. Unit margin equals profit before fixed operating expenses
are considered and before interest and income tax are deducted. Unit
margin is one of the key variables in a profit model for decision-making
analysis.

## Correlation Coefficient

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

## Expected Value

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

## Standard Deviation

A statistical term that measures the dispersion of a variable
around its expected value. The standard deviation is often used as
a measure of risk when applied to a return on an investment.

## 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

## 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

## 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 ratio

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

## correlation analysis

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

## 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 organizationâ€™s
fixed and variable costs

## direct costing

see variable costing

## 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

## 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

## 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

## mixed cost

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

## multiple regression

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