Definition of standard
standard
a model or budget against which actual results are
compared and evaluated; a benchmark or norm used for
planning and control purposes
Related Terms:
The Association for Investment Management and Research (AIMR)'s Performance Presentation standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR Performance
Presentation standards (AIMR-PPS(TM)) for portfolio performance presentations.
A system of fixing exchange rates adopted in the Bretton Woods agreement. It
involved the U.S. pegging the dollar to gold and other countries pegging their currencies to the dollar.
An international monetary system in which currencies are defined in terms of their gold
content and payment imbalances between countries are settled in gold. It was in effect from about 1870-1914.
The square root of the variance. A measure of dispersion of a set of data from their mean.
In statistics, a measure of the possible error in an estimate.
A normal distribution with a mean of 0 and a standard deviation of 1.
Also called the normal deviate, the distance of one data point from the mean, divided by
the standard deviation of the distribution.
This is a currency translation standard previously in
use by U.S. accounting firms. See: Statement of Accounting standards No. 52.
This is the currency translation standard currently
used by U.S. firms. It mandates the use of the current rate method. See: Statement of Financial Accounting
standards No. 8.
A budget cost for materials and labour used for decision-making, usually expressed as a per unit cost that is applied to standard quantities from a bill of materials and to standard times from a
routing.
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.
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
a standard representing beliefs about moral
and immoral behaviors
standard set at a level that reflects what
is actually expected to occur in the future period; it anticipates
future waste and inefficiencies and allows for them;
is of limited value for control and performance evaluation purposes
a standard that provides for no inefficiencies
of any type; impossible to attain on a continuous basis
perfection standard
see ideal standard
practical standard
a standard that can be reached or slightly
exceeded with reasonable effort by workers; it allows for
normal, unavoidable time problems or delays and for
worker breaks; it is often believed to be most effective in
inducing the best performance from workers, since such
a standard represents an attainable challenge
standard cost
a budgeted or estimated cost to manufacture
a single unit of product or perform a single service
standard cost card
a document that summarizes the direct
material, direct labor, and overhead standard quantities and
prices needed to complete one unit of product
standard cost system
a valuation method that uses predetermined
norms for direct material, direct labor, and overhead
to assign costs to the various inventory accounts and
Cost of Goods Sold
standard deviation
the measure of variability of data around
the average (or mean) value of the data
standard error of the estimate
a measure of dispersion that reflects the average difference between actual observations and expected results provided by a regression line
standard overhead application rate
a predetermined overhead rate used in a standard cost system; it can be a separate variable or fixed rate or a combined overhead rate
standard quantity allowed
the quantity of input (in hours or some other cost driver measurement) required at standard for the output actually achieved for the period
Standard deviation
A measure of the variation in a distribution, equal to the
square root of the arithmetic mean of the squares of the deviations from the
arithmetic mean; the square root of the variance.
Standard cost
A predetermined cost that is based on original engineering designs and
production methodologies. It is frequently used to determine the degree of additional
actual costs incurred above the standard rates.
Standard & Poor’s Composite Index
Index of the investment performance of a portfolio of 500 large stocks. Also called the
S&P 500.
standard deviation
Square root of variance. Another measure of volatility.
Gold Standard
A fixed exchange rate system in which a currency is directly convertible into gold.
Contract Work Hours and Safety Standards Act
A federal Act requiring federal contractors to pay overtime for hours worked exceeding 40 per week.
Fair Labor Standards Act of 1938
A federal Act creating standards of overtime
pay, minimum wages, and payroll recordkeeping.
Part standardization
The planned reduction of similar parts through the standardization
of parts among multiple products.
Standard containers
Common-sized containers that are used to efficiently move,
store, and count inventory.
Appraisal ratio
The signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual standard
deviation.
Black-Scholes option-pricing model
A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.
Boilerplate
standard terms and conditions.
CBOE
Chicago Board Options Exchange. A securities exchange created in the early 1970s for the public
trading of standardized option contracts.
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.
Difference from S&P
A mutual fund's return minus the change in the standard & Poors 500 Index for the
same time period. A notation of -5.00 means the fund return was 5 percentage points less than the gain in the
S&P, while 0.00 means that the fund and the S&P had the same return.
Efficient portfolio
A portfolio that provides the greatest expected return for a given level of risk (i.e. standard
deviation), or equivalently, the lowest risk for a given expected return.
Efficient set Graph representing a set of portfolios that maximize expected return at each level of portfolio
risk.
Ethics
standards of conduct or moral judgement.
FASB
Financial Accounting standards Board. Sets accounting standards for U.S. firms.
FASB No. 8
U.S. accounting standard that requires U.S. firms to translate their foreign affiliates' accounts by
the temporal method. Gains and losses from currency fluctuations were reported in current income. It was in
effect between 1975 and 1981 and became the most controversial accounting standard in the U.S. It was
replaced by FASB No. 52 in 1981.
FASB No. 52
The U.S. accounting standard which was replaced by FASB No. 8. U.S. companies are required
to translate foreign accounts by the current rate and report the changes from currency fluctuations in a
cumulative translation adjustment account in the equity section of the balance sheet.
Fixed-dates
In the Euromarket the standard periods for which Euros are traded (1 month out to a year out) are
referred to as the fixed dates.
Forward contract
A cash market transaction in which delivery of the commodity is deferred until after the
contract has been made. It is not standardized and is not traded on organized exchanges. Although the
delivery is made in the future, the price is determined at the initial trade date.
Junk bond
A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower is a junk or high
yield bond. Such bonds offer investors higher yields than bonds of financially sound companies. Two
agencies, standard & Poors and Moody's investor Services, provide the rating systems for companies' credit.
Long coupons
1) Bonds or notes with a long current maturity.
2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.
Long coupons
1) Bonds or notes with a long current maturity.
2) A bond on which one of the coupon
periods, usually the first, is longer than the other periods or the standard period.
Mortgage duration
A modification of standard duration to account for the impact on duration of MBSs of
changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that
reflects the impact of changes in prepayment speed or price.
Normal deviate
Related: standardized value
Objective (mutual fund)
The fund's investment strategy category as stated in the prospectus. There are
more than 20 standardized categories.
Opportunity set
The possible expected return and standard deviation pairs of all portfolios that can be
constructed from a given set of assets.
Plain vanilla
A term that refers to a relatively simple derivative financial instrument, usually a swap or other
derivative that is issued with standard features.
Portfolio opportunity set
The expected return/standard deviation pairs of all portfolios that can be
constructed from a given set of assets.
Price-specie-flow mechanism
Adjustment mechanism under the classical gold standard whereby
disturbances in the price level in one country would be wholly or partly offset by a countervailing flow of
specie (gold coins) that would act to equalize prices across countries and automatically bring international
payments back in balance.
Reward-to-volatility ratio
Ratio of excess return to portfolio standard deviation.
Risk
Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of
return on an asset.
Securitization
The process of creating a passthrough, such as the mortgage pass-through security, by which
the pooled assets become standard securities backed by those assets. Also, refers to the replacement of
nonmarketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued
in the public capital markets.
Settlement rate
The rate suggested in Financial Accounting standard Board (FASB) 87 for discounting the
obligations of a pension plan. The rate at which the pension benefits could be effectively settled off the
pension plan wished to terminate its pension obligation.
SIC
Abbreviation for standard Industrial Classification. Each 4-digit code represents a unique business activity.
Side effects Effects of a proposed project on other parts of the firm.
Stockholder's books
Set of books kept by firm management for its annual report that follows Financial
Accounting standards Board rules. The tax books follow IRS tax rules.
Tax books
Set of books kept by a firm's management for the IRS that follows IRS rules. The stockholder's
books follow Financial Accounting standards Board rules.
Two-sided market
A market in which both bid and asked prices, good for the standard unit of trading, are quoted.
Variance
A measure of dispersion of a set of data points around their mean value. The mathematical
expectation of the squared deviations from the mean. The square root of the variance is the standard deviation.
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
Z score
Statistical measure that quantifies the distance (measured in standard deviations) a data point is from
the mean of a data set. Separately, z score is the output from a credit-strength test that gauges the likelihood of
bankruptcy.
Flexible budget
A method of budgetary control that flexes, i.e. adjusts the original budget by applying standard
prices and costs per unit to the actual production volume.
accrual-basis accounting
Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. Recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has many assets other than cash, as well as
many liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
system—one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.
debt-to-equity ratio
A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.
generally accepted accounting principles (GAAP)
This important term
refers to the body of authoritative rules for measuring profit and preparing
financial statements that are included in financial reports by a business
to its outside shareowners and lenders. The development of these
guidelines has been evolving for more than 70 years. Congress passed a
law in 1934 that bestowed primary jurisdiction over financial reporting
by publicly owned businesses to the Securities and Exchange Commission
(SEC). But the SEC has largely left the development of GAAP to the
private sector. Presently, the Financial Accounting standards Board is
the primary (but not the only) authoritative body that makes pronouncements
on GAAP. One caution: GAAP are like a movable feast. New rules
are issued fairly frequently, old rules are amended from time to time,
and some rules established years ago are discarded on occasion. Professional
accountants have a heck of time keeping up with GAAP, that’s for
sure. Also, new GAAP rules sometimes have the effect of closing the barn
door after the horse has left. Accounting abuses occur, and only then,
after the damage has been done, are new rules issued to prevent such
abuses in the future.
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.
internal rate of return (IRR)
The precise discount rate that makes the
present value (PV) of the future cash returns from a capital investment
exactly equal to the initial amount of capital invested. If IRR is higher
than the company’s cost-of-capital rate, the investment is an attractive
opportunity; if less, the investment is substandard from the cost-ofcapital
point of view.
net present value (NPV)
Equals the present value (PV) of a capital investment
minus the initial amount of capital that is invested, or the entry cost
of the investment. A positive NPV signals an attractive capital investment
opportunity; a negative NPV means that the investment is substandard.
Benchmark
A standard by which something may be compared and measured
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
budget variance
the difference between total actual overhead
and budgeted overhead based on standard hours allowed
for the production achieved during the period; computed
as part of two-variance overhead analysis; also
referred to as the controllable variance
CASB
see Cost Accounting standards Board
coefficient of variation
a measure of risk used when the standard deviations for multiple projects are approximately
the same but the expected values are significantly different
defective unit
a unit that has been rejected at a control inspection
point for failure to meet appropriate standards of
quality or designated product specifications; can be economically
reworked and sold through normal distribution channels
electronic data interchange (EDI)
the computer-to-computer transfer of information in virtual real time using standardized formats developed by the American National standards Institute
failure cost
a quality control cost associated with goods or
services that have been found not to conform or perform
to the required standards as well as all related costs (such
as that of the complaint department); it may be internal or
external
General Agreement
on Tariffs and Trade (GATT) a treaty
among many nations setting standards for tariffs and trade
for signees
ISO 9000
a comprehensive series of international quality standards
that define the various design, material procurement,
production, quality-control, and delivery requirements and
procedures necessary to produce quality products and services
ISO 14000
a series of international standards that are designed
to support a company’s environmental protection
and pollution prevention goals in balance with socioeconomic
needs
labor efficiency variance
the number of hours actually worked minus the standard hours allowed for the production
achieved multiplied by the standard rate to establish
a value for efficiency (favorable) or inefficiency (unfavorable)
of the work force
labor mix variance
(actual mix X actual hours X standard rate) - (standard mix X actual hours X standard rate);
it presents the financial effect associated with changing the
proportionate amount of higher or lower paid workers in production
labor rate variance
the actual rate (or actual weighted average rate) paid to labor for the period minus the standard rate multiplied by all hours actually worked during the period;
it is actual labor cost minus (actual hours X standard rate)
labor yield variance
(standard mix X actual hours X standard rate) - (standard mix X standard hours X standard rate);
it shows the monetary impact of using more or fewer total hours than the standard allowed
material price variance
total actual cost of material purchased
minus (actual quantity of material standard
price); it is the amount of money spent below (favorable)
or in excess (unfavorable) of the standard price for the
quantity of materials purchased; it can be calculated based
on the actual quantity of material purchased or the actual
quantity used
material quantity variance
(actual quantity X standard price) - (standard quantity allowed standard price);
the standard cost saved (favorable) or expended (unfavorable)
due to the difference between the actual quantity
of material used and the standard quantity of material
allowed for the goods produced during the period
material mix variance
(actual mix X actual quantity X standard price) - (standard mix X actual quantity X standardprice);
it computes the monetary effect of substituting a nonstandard mix of material
material yield variance
(standard mix X actual quantity X standard price) - (standard mix X standard quantity X standard price);
it computes the difference between the
actual total quantity of input and the standard total quantity
allowed based on output and uses standard mix and
standard prices to determine variance
overhead efficiency variance
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
predetermined overhead rate
an estimated constant charge per unit of activity used to assign overhead cost to production or services of the period; it is calculated by dividing total budgeted annual overhead at a selected level of volume or activity by that selected measure of volume or activity; it is also the standard overhead application rate
spoiled unit
a unit that is rejected at a control inspection
point for failure to meet appropriate standards of quality
or designated product specifications; it cannot be economically
reworked to be brought up to standard
total variance
the difference between total actual cost incurred
and total standard cost for the output produced during
the period
variance
a difference between an actual and a standard or
budgeted cost; it is favorable if actual is less than standard
and is unfavorable if actual is greater than standard
variance analysis
the process of categorizing the nature (favorable or unfavorable) of the differences between standard and actual costs and determining the reasons for those differences
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