**Basic Terms, Concepts, & Definitions**

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

##### \[A\]

##### 

##### ABC Model 

A representation of resource costs during a time period that are
consumed through activities and traced to products, services, and
customers or to any other object that creates a demand for the activity
to be performed.

##### ABC System 

A system that maintains financial and operating data on an
organization\'s resources, activities, drivers, objects and measures.
ABC models are created and maintained within this system.

##### Activity 

Work performed by people, equipment, technologies or facilities.
Activities are usually described by the "action-verb-adjective-noun"
grammar convention. Activities may occur in a linked sequence and
activity-to-activity assignments may exist.

##### Activity Analysis 

The process of identifying and cataloging activities for detailed
understanding and documentation of their characteristics. An activity
analysis is accomplished by means of interviews, group sessions,
questionnaires, observations, and reviews of physical records of work.

**Activity-Based Budgeting (ABB)**

An approach to budgeting where a company uses an understanding of its
activities and driver relationships to quantitatively estimate workload
and resource requirements as part of an ongoing business plan. Budgets
show the types, number of and cost of resources that activities are
expected to consume, based on forecasted workloads. The budget is part
of an organization\'s activity-based planning process and can be used in
evaluating its success in setting and pursuing strategic goals. (See
Activity-Based Planning .)

**Activity-Based Costing (ABC)**

A methodology that measures the cost and performance of cost objects,
activities and resources. Cost objects consume activities and activities
consume resources. Resource costs are assigned to activities based on
their use of those resources, and activity costs are reassigned to cost
objects (outputs) based on the cost objects\' proportional use of those
activities. Activity-based costing incorporates causal relationships
between cost objects and activities and between activities and
resources.

**Activity-Based Management (ABM)**

A discipline focusing on the management of activities within business
processes as the route to continuously improve both the value received
by customers and the profit earned in providing that value. ABM uses
activity-based cost information and performance measurements to
influence management action. (See Activity-Based Costing .)

**Activity-Based Planning (ABP)**

Activity-based planning (ABP) is an ongoing process to determine
activity and resource requirements (both financial and operational)
based on the ongoing demand of products or services by specific customer
needs. Resource requirements are compared to resources available and
capacity issues are identified and managed. Activity-based budgeting
(ABB) is based on the outputs of activity-based planning. (See
Activity-Based Budgeting .)

##### Activity Dictionary 

A listing and description of activities that provides a common/standard
definition of activities across the organization. An activity dictionary
can include information about an activity and/or its relationships, such
as activity description, business process, function source, whether
value-added, inputs, outputs, supplier, customer, output measures, cost
drivers, attributes, tasks, and other information as desired to describe
the activity.

##### Activity Driver 

The best single quantitative measure of the frequency and intensity of
the demands placed on an activity by cost objects or other activities.
It is used to assign activity costs to cost objects or to other
activities.

##### Activity Level 

A description of how elastic or sensitive an activity is to changes in
the volume, diversity, or complexity of a cost object or another
activity. Product-related activity levels may include unit, batch, and
product levels. Customer-related activity levels may include customer,
market, channel, and project levels.

##### Allocation 

A distribution of costs using calculations that may be unrelated to
physical observations or direct or repeatable cause-and-effect
relationships. Because of the arbitrary nature of allocations, costs
based on cost causal assignment are viewed as more relevant for
management decision-making. (Contrast with Tracing and Assignment.)

##### Assignment 

A distribution of costs using causal relationships. Because cost causal
relationships are viewed as more relevant for management
decision-making, assignment of costs is generally preferable to
allocation techniques. (Synonymous with Tracing . Contrast with
Allocation .)

##### Attributes 

A label used to provide additional classification or information about a
resource, activity, or cost object. Used for focusing attention and may
be subjective. Examples are a characteristic, a score or grade of
product or activity, or groupings of these items, and performance
measures.

**\[B\]**

##### Best Practices 

A methodology that identifies the measurement or performance by which
other similar items will be judged. This methodology is used to
establish performance standards and to aid in identifying opportunities
to increase effectiveness and efficiency. Best practices methodology may
be applied with respect to resources, activities, cost object, or
processes.

**Bill of Activities**

A listing of activities required by a product, service, process output
or other cost object. Bill of activity attributes could include volume
and or cost of each activity in the listing.

##### Bill of Resources

A listing of resources required by an activity. Resource attributes
could include cost and volumes.

**\[C\]**

##### Capacity 

The physical facilities, personnel and process available to meet the
product or service needs of customers. Capacity generally refers to the
maximum output or producing ability of a machine, a person, a process, a
factory, a product, or a service. (See Capacity Management .)

##### Capacity Management 

The domain of cost management that is grounded in the concept that
capacity should be understood, defined, and measured for each level in
the organization to include market segments, products, processes,
activities, and resources. In each of these applications, capacity is
defined in a hierarchy of idle, non-productive, and productive views.

##### Constraint 

A bottleneck, obstacle or planned control that limits throughput or the
utilization of capacity.

##### Cost Center 

A sub-unit in an organization that is responsible for costs.

##### Cost Driver 

Any situation or event that causes a change in the consumption of a
resource, or influences quality or cycle time. An activity may have
multiple cost drivers. Cost drivers do not necessarily need to be
quantified; however, they strongly influence the selection and magnitude
of resource drivers and activity drivers.

##### Cost Driver Analysis 

The examination, quantification, and explanation of the effects of cost
drivers. The results are often used for continuous improvement programs
to reduce throughput times, improve quality, and reduce cost.

##### Cost Element 

The lowest level component of a resource, activity, or cost object.

##### Cost Management 

The management and control of activities and drivers to calculate
accurate product and service costs, improve business processes,
eliminate waste, influence cost drivers, and plan operations. The
resulting information will have utility in setting and evaluating an
organization\'s strategies.

##### Cost Object 

Any product, service, customer, contract, project, process or other work
unit for which a separate cost measurement is desired.

##### Cost Object Driver 

The best single quantitative measure of the frequency and intensity of
demands placed on a cost object by other cost objects.

##### Cost Pool 

A logical grouping of Resources or Activities aggregated to simplify the
assignment of resources to activities or activities to cost objects.
Elements within a group may be aggregated or disaggregated depending on
the informational and accuracy requirements of the use of the data. A
modifier may be appended to further describe the group of costs, i.e.
Activity Cost Pool.

##### Cross-Subsidy 

The inequitable assignment of costs to cost objects, which leads to over
costing or under costing them relative to the amount of activities and
resources actually consumed. This may result in poor management
decisions that are inconsistent with the economic goals of the
organization.

**\[D\]**

##### Direct Cost 

A cost that can be directly traced to a cost object since a direct or
repeatable cause-and-effect relationship exists. A direct cost uses a
direct assignment or cost causal relationship to transfer costs. (See
also Indirect Cost, Tracing.)

**\[E\]**

##### Enterprise-Wide ABM 

A management information system that uses activity-based information to
facilitate decision making across an organization.

**\[H\]**

##### Hierarchy of Cost Assignability 

An approach to group activity costs at the level of an organization
where they are incurred, or can be directly related to. Examples are the
level where individual units are identified (unit-level), where batches
of units are organized or processed (batch-level), where a process is
operated or supported (process-level), or where costs cannot be
objectively assigned to lower level activities or processes
(facility-level). This approach is used to better understand the nature
of the costs, including the level in the organization at which they are
incurred, the level to which they can be initially assigned (attached)
and the degree to which they are assignable to other activity and/or
cost object levels, i.e. activity or cost object cost, or sustaining
costs.

**\[I\]**

##### Indirect Cost 

A resource or activity cost that cannot be directly traced to a final
cost object since no direct or repeatable cause-and-effect relationship
exists. An indirect cost uses an assignment or allocation to transfer
cost. (See Direct Cost , Support Costs .)

**\[L\]**

##### Life Cycle Cost 

A product\'s life cycle is the period that starts with the initial
product conceptualization and ends with the withdrawal of the product
from the marketplace and final disposition. A product life cycle is
characterized by certain defined stages, including research,
development, introduction, maturity, decline, and abandonment. Life
cycle cost is the accumulated costs incurred by a product during these
stages.

**\[P\]**

##### Pareto Analysis 

An analysis that compares cumulative percentages of the rank ordering of
costs, cost drivers, profits or other attributes to determine whether a
minority of elements have a disproportionate impact. For example,
identifying that 20 percent of a set of independent variables is
responsible for 80 percent of the effect.

##### Performance Measures 

Indicators of the work performed and the results achieved in an
activity, process, or organizational unit. Performance measures are both
non-financial and financial. Performance measures enable periodic
comparisons and benchmarking.

##### Process 

A series of time-based activities that are linked to complete a specific
output.

##### Profitability Analysis 

The analysis of profit derived from cost objects with the view to
improve or optimize profitability. Multiple views may be analyzed, such
as market segment, customer, distribution channel, product families,
products, technologies, platforms, regions, manufacturing capacity, etc.

**\[R\]**

##### Resource Driver 

The best single quantitative measure of the frequency and intensity of
demands placed on a resource by other resources, activities, or cost
objects. It is used to assign resource costs to activities, and cost
objects, or to other resources.

##### Resources 

Economic elements applied or used in the performance of activities or to
directly support cost objects. They include people, materials, supplies,
equipment, technologies and facilities. (See Resource Driver , Capacity
.)

**\[S\]**

##### Support Costs 

Costs of activities not directly associated with producing or delivering
products or services. Examples are the costs of information systems,
process engineering and purchasing. (See Indirect Cost .)

##### Surrogate \[item\] Driver 

A substitute for the ideal driver, but is closely correlated to the
ideal driver, where \[item\] is Resource, Activity, Cost Object. A
surrogate driver is used to significantly reduce the cost of measurement
while not significantly reducing accuracy. For example, the number of
production runs is not descriptive of the material disbursing activity,
but the number of production runs may be used as an activity driver if
material disbursements correlate well with the number of production
runs.

##### Sustaining Activity 

An activity that benefits an organizational unit as a whole, but not any
specific cost object.

**\[T\]**

##### Target Costing 

A target cost is calculated by subtracting a desired profit margin from
an estimated or a market-based price to arrive at a desired production,
engineering, or marketing cost. This may not be the initial production
cost, but one expected to be achieved during the mature production
stage. Target costing is a method used in the analysis of product design
that involves estimating a target cost and then designing the
product/service to meet that cost. (See Value Analysis .)

##### Tasks 

The breakdown of the work in an activity into smaller elements.

##### Tracing 

The practice of relating resources, activities and cost objects using
the drivers underlying their cost causal relationships. The purpose of
tracing is to observe and understand how costs are arising in the normal
course of business operations. (Synonymous with Assignment . Contrast
with Allocation .)

**\[U\]**

##### Unit Cost 

The cost associated with a single unit of measure underlying a resource,
activity, product or service. It is calculated by dividing the total
cost by the measured volume. Unit cost measurement must be used with
caution as it may not always be practical or relevant in all aspects of
cost management.

**Unit of Driver Measure**

The common denominator between groupings of similar activities. Example:
20 hours of process time is performed in an activity center. This time
equates to a number of common activities varying in process time
duration. The unit of measure is a standard measure of time such as a
minute or an hour.

**\[V\]**

##### Value-Adding/Non-Value-Adding 

Assessing the relative value of activities according to how they
contribute to customer value or to meeting an organization\'s needs. The
degree of contribution reflects the influence of an activity\'s cost
driver(s).

##### Value Analysis 

A method to determine how features of a product or service relate to
cost, functionality, appeal and utility to a customer (i.e., engineering
value analysis). (See Target Costing .)

##### Value Chain Analysis 

A method to identify all the elements in the linkage of activities a
firm relies on to secure the necessary materials and services, starting
from their point of origin, to manufacture, and to distribute their
products and services to an end user.