CS Executive CAFM key terms

Sales revenue minus all variable costs. It measures how much each sale contributes toward covering fixed costs and then generating profit, and it underpins break-even and marginal costing decisions.

The sales volume or value at which total revenue equals total cost, so profit is zero. It is computed by dividing fixed costs by contribution per unit or the contribution-to-sales ratio.

The excess of actual or budgeted sales over break-even sales, expressed in units, value, or percentage. It shows how far sales can fall before losses begin and signals operating risk.

Contribution divided by sales, expressed as a percentage. It indicates the proportion of each sales rupee available to absorb fixed costs, and it converts a required profit target into required sales value.

A control technique that sets predetermined costs for materials, labour, and overhead, then compares them with actual costs to compute variances, so managers can investigate deviations and fix accountability.

The process of decomposing the gap between standard and actual cost into price and quantity components for each cost element, identifying whether inefficiency or price movement caused the deviation.

A future, incremental cash cost that differs between alternatives under consideration. Sunk costs and allocated fixed costs are excluded because they cannot change the decision.

The benefit forgone by choosing one alternative over the next best use of the same resource. It is included in decision-making even though no cash outflow is recorded in accounting books.

An overhead allocation method that assigns costs to activities and then to products using cost drivers such as machine setups or purchase orders, producing more accurate product costs than a single volume-based rate.

Any factor that causes a change in the cost of an activity, such as number of setups, machine hours, or inspection hours. It forms the allocation base in activity-based costing.

The process of charging indirect production costs to units produced using a predetermined rate, usually per labour hour, machine hour, or direct material value, with over- or under-absorption corrected at period end.

A budget prepared for several activity levels by separating fixed and variable elements, allowing a fair comparison of actual results with the budgeted amount for the activity actually achieved.

The principle that a rupee received today is worth more than the same rupee received later, because it can be invested and earn a return. It underlies discounting and compounding calculations.

The sum of expected cash flows discounted at the project's cost of capital, minus the initial outlay. A positive value means the project adds value and should be accepted.

The discount rate at which a project's net present value equals zero. It is compared with the cost of capital or hurdle rate to accept or reject an investment proposal.

Present value of a project's future cash inflows divided by its initial investment. A value above one indicates acceptance and it helps rank projects when capital is rationed.

The rate used to convert future cash flows into present value, reflecting the risk and time preference of the investor. It is usually the weighted average cost of capital for a firm.

The minimum return a firm must earn on its investments to satisfy lenders and shareholders. It is computed as the weighted average of after-tax debt cost and equity cost.

The blended cost of all long-term funds, weighting each source's after-tax cost by its share in the capital structure. It serves as the hurdle rate for investment appraisal.

The mix of debt and equity a firm uses to finance its assets. Its composition affects financial risk, the weighted cost of capital, and therefore firm value.

The use of fixed-cost debt in the capital structure to magnify the effect of changes in operating profit on earnings per share. Higher leverage raises return potential and financial risk.

The proportion of fixed costs in a firm's cost structure, which magnifies the effect of sales changes on operating profit. It is measured by contribution divided by earnings before interest and tax.

The process of evaluating and selecting long-term investment projects whose returns accrue over several years. It uses discounted cash flow and payback techniques to allocate scarce capital.

The time required for cumulative cash inflows to recover the initial investment outlay. It is simple and emphasises liquidity but ignores cash flows after payback and the time value of money.

A situation where a firm has limited funds and cannot undertake every positive net present value project, so it must rank and select projects using profitability index or similar criteria.

The funds tied up in current assets such as inventory, receivables, and cash, less current liabilities. It measures the liquidity available to run day-to-day operations.

The period from purchasing raw material to collecting cash from the sale of finished goods. It combines inventory holding time and receivables collection time and determines working capital needs.

Inventory days plus receivable days minus payable days. It measures how long cash is locked in operations, and shortening it releases funds and reduces financing requirements.

Current assets divided by current liabilities. It tests short-term solvency, with a value near two conventionally treated as comfortable, though the norm varies by industry.

Quick assets, meaning current assets excluding inventory and prepayments, divided by current liabilities. It is a stricter liquidity test because it ignores the least liquid current assets.

The order size at which total ordering cost and carrying cost are minimised. It balances the trade-off between frequent small orders and large orders held in stock.

Market-wide risk arising from interest rates, inflation, or economic conditions that cannot be removed by diversification. It is measured by beta and is the only risk priced in equilibrium.

Firm-specific risk such as management failure, strikes, or product obsolescence. It can be eliminated by holding a diversified portfolio, so the market does not reward it with extra return.

A measure of a security's sensitivity to movements in the market index. A beta above one means the stock is more volatile than the market and carries higher systematic risk.

A model that prices a security as the risk-free rate plus beta times the market risk premium. It links expected return to systematic risk and estimates the cost of equity.

Spreading investment across many securities or asset classes so that firm-specific risks offset each other. It reduces unsystematic risk but cannot remove market-wide systematic risk.

A combination of two or more securities held by an investor. Its expected return is the weighted average of component returns, while its risk depends on the correlation between them.

The segment where new securities are issued and sold for the first time, through an initial public offering or rights issue, with proceeds flowing to the issuer.

The exchange or over-the-counter platform where already-issued securities trade between investors. Proceeds do not go to the issuer; the market provides liquidity and price discovery.