Manufacturing Finance Glossary

Terms

13-week cash flow forecast

A rolling, week-by-week projection of cash receipts and disbursements over the next quarter, built on actual timing — payroll, supplier terms, customer collections, debt service — rather than accrual accounting.

Why it matters at $10M revenue It turns cash from something you discover into something you plan.

Absorption costing

A costing method that includes direct materials, direct labor and both variable and fixed manufacturing overhead in product cost. It is required for external financial reporting under US GAAP and for inventory on tax returns.

Why it matters at $10M revenue Under absorption costing, building inventory can raise reported profit even when sales are flat.

Accrual basis accounting

Recording revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. Required under US GAAP and essential for meaningful inventory and margin reporting.

Why it matters at $10M revenue Cash-basis books can’t show a manufacturer’s true monthly margin or inventory position.

Activity-based costing (ABC)

A method that assigns overhead to products based on the activities they consume — setups, inspections, purchase orders, engineering changes — rather than a single volume-based rate.

Why it matters at $10M revenue ABC often reveals that low-volume, high-complexity products cost far more than a single rate suggests.

Actual costing

A costing method that records the real materials, labor and overhead consumed by each job or batch, rather than a planned cost. It suits custom and low-volume work where every order is different.

Why it matters at $10M revenue Actual job costs show which custom jobs truly made money, but only if time and materials are captured by job.

Backflush costing

A simplified costing method that records material and labor consumption after production is completed, by multiplying output by the standard bill of material, instead of tracking each issue in real time.

Why it matters at $10M revenue Backflushing reduces transactions but only works when bills of material match the floor.

Bill of materials (BOM)

The structured list of raw materials, components, sub-assemblies and quantities required to make one unit of a product. It drives material cost, purchasing and inventory consumption.

Why it matters at $10M revenue A BOM that doesn’t match what the floor actually uses makes every standard cost wrong.

Break-even point

The sales volume at which total revenue equals total costs, so profit is zero. Above it, each sale contributes to profit.

Formula Break-even units = Fixed costs ÷ Contribution margin per unit

Why it matters at $10M revenue Knowing break-even tells you how much a slowdown your plant can absorb.

Burden rate

The fully loaded cost of labor beyond base wages — payroll taxes, workers’ compensation, benefits and paid time off — often expressed as a percentage of wages or an hourly amount.

Formula Burden rate = (Payroll taxes + Benefits + Workers’ comp + Paid time off) ÷ Direct wages

Why it matters at $10M revenue Quoting on wages instead of burdened labor understates the cost of every hour.

Capacity utilization

Actual output as a percentage of the maximum output the plant or a work center could produce in the same time.

Formula Capacity utilization = Actual output ÷ Potential output

Why it matters at $10M revenue Utilization drives overhead absorption and tells you when to add a shift or a machine.

Cash conversion cycle

The number of days between paying for inventory and collecting cash from the customer who buys it. It measures how long cash is tied up in operations.

Formula Cash conversion cycle = DIO + DSO − DPO

Why it matters at $10M revenue It tells you how much working capital each new dollar of revenue will require.

Chart of accounts

The structured list of every account in the general ledger — assets, liabilities, equity, revenue and expenses — that determines how transactions are classified and reported.

Why it matters at $10M revenue A manufacturing chart of accounts separates COGS components so margins can be analyzed.

Contribution margin

Revenue minus variable costs, expressed per unit, per product or in total. It is the amount each sale contributes toward fixed costs and profit after covering the costs that rise and fall with volume.

Formula Contribution margin = Revenue − Variable costs

Why it matters at $10M revenue Ranking products by contribution margin often shows that a few lines carry the business.

Contribution margin per constraint hour

Contribution margin divided by the hours a product uses on the bottleneck resource. When capacity is limited, it ranks products by how much margin they earn for each hour of the scarce machine or process.

Formula CM per constraint hour = Contribution margin per unit ÷ Constraint hours per unit

Why it matters at $10M revenue When a key machine is full, this metric decides which orders to accept.

Cost of goods manufactured (COGM)

The total production cost of all goods completed during a period: direct materials used, direct labor and manufacturing overhead, adjusted for the change in work-in-process inventory. It is the value transferred from WIP into finished goods.

Formula COGM = Direct materials used + Direct labor + Manufacturing overhead + Beginning WIP − Ending WIP

Why it matters at $10M revenue At $10M, COGM shows whether production cost per unit is drifting before it reaches your gross margin.

Cost of goods sold (COGS)

The cost of the products actually sold in a period, recognized in the same period as the related revenue. For a manufacturer it is cost of goods manufactured adjusted for the change in finished-goods inventory.

Formula COGS = Beginning finished goods + COGM − Ending finished goods

Why it matters at $10M revenue Recognizing COGS when product ships, not when it is built, is what makes a monthly gross margin trustworthy.

Cost of quality

The total cost of preventing, finding and fixing defects: prevention and appraisal costs such as training and inspection, plus internal failures like scrap and rework and external failures like returns and warranty claims.

Formula Cost of quality = Prevention + Appraisal + Internal failure + External failure

Why it matters at $10M revenue Failure costs are usually spread across many accounts, so few manufacturers see how large they really are.

Cycle counting

Counting a portion of inventory on a rotating schedule throughout the year instead of a single annual physical count, with high-value or fast-moving items counted more often.

Why it matters at $10M revenue Cycle counts keep book inventory accurate and prevent one painful year-end write-down.

Days inventory outstanding (DIO)

The average number of days inventory is held before it is sold. It converts inventory turns into days and is one component of the cash conversion cycle.

Formula DIO = (Average inventory ÷ Cost of goods sold) × 365

Why it matters at $10M revenue DIO tells you how long cash sits on the shelf before it can come back.

Days payable outstanding (DPO)

The average number of days a company takes to pay its suppliers. A higher DPO keeps cash in the business longer, within the limits of supplier relationships.

Formula DPO = (Accounts payable ÷ Cost of goods sold) × Number of days in the period

Why it matters at $10M revenue DPO is the one cash-cycle lever that works in your favor.

Days sales outstanding (DSO)

The average number of days it takes to collect payment after a sale. It measures how quickly receivables turn into cash.

Formula DSO = (Accounts receivable ÷ Revenue) × Number of days in the period

Why it matters at $10M revenue Cutting DSO by ten days can free significant cash without borrowing.

EBITDA

Earnings before interest, taxes, depreciation and amortization. A proxy for operating cash earnings used by lenders and buyers, though it ignores capital spending and working capital.

Formula EBITDA = Net income + Interest + Taxes + Depreciation + Amortization

Why it matters at $10M revenue Lenders set covenants and buyers set prices off EBITDA, so its quality matters.

Enterprise resource planning (ERP)

Software that integrates accounting, inventory, purchasing, production and sales in one system with a shared database, so operations and finance work from the same records.

Why it matters at $10M revenue An ERP makes sense when reconciling separate systems has become someone’s job.

FIFO (first in, first out)

An inventory cost-flow assumption in which the oldest inventory costs are charged to cost of goods sold first, leaving the most recent costs in ending inventory.

Why it matters at $10M revenue When costs are rising, FIFO reports higher profit and higher taxable income than LIFO.

Fixed asset turnover

Revenue divided by net property, plant and equipment. It measures how effectively a manufacturer uses its equipment and facilities to generate sales.

Formula Fixed asset turnover = Revenue ÷ Average net PP&E

Why it matters at $10M revenue It helps judge whether new equipment is earning its keep.

Gross margin

Revenue minus cost of goods sold, expressed as a percentage of revenue. It shows how much of each sales dollar remains after the direct cost of making the product.

Formula Gross margin = (Revenue − COGS) ÷ Revenue

Why it matters at $10M revenue Monthly swings in gross margin usually signal costing or timing errors, not real performance.

Inventory turns

How many times inventory is sold and replaced during a period. Higher turns mean less cash tied up in stock relative to sales.

Formula Inventory turns = Cost of goods sold ÷ Average inventory

Why it matters at $10M revenue One extra turn a year can release a large share of a $10M manufacturer’s working capital.

Job costing

Accumulating materials, labor and overhead separately for each job or customer order, so every job shows its own cost and margin. It suits custom, engineered-to-order and low-volume work.

Why it matters at $10M revenue Job costing tells a job shop which customers and job types are actually profitable.

Just-in-time (JIT)

A production approach that receives materials and makes products only as needed for current demand, minimizing inventory and the cash it ties up.

Why it matters at $10M revenue JIT frees cash but raises exposure to supplier delays — model the risk before cutting safety stock.

Labor efficiency variance

The difference between actual hours worked and the standard hours allowed for the output produced, valued at the standard labor rate. It shows whether jobs took longer than their routings allow.

Formula Efficiency variance = (Actual hours − Standard hours allowed) × Standard rate

Why it matters at $10M revenue Efficiency variances point to the routings, machines or crews that are eroding margin.

Labor rate variance

The difference between the actual wage rate paid and the standard rate, multiplied by actual hours worked. It reflects overtime premiums, wage changes or a different crew mix than planned.

Formula Labor rate variance = (Actual rate − Standard rate) × Actual hours

Why it matters at $10M revenue Persistent unfavorable rate variances usually mean overtime is masking a capacity problem.

Landed cost

The full cost of getting purchased goods to your facility: the supplier price plus freight, insurance, customs duties, tariffs, brokerage and handling. Under GAAP these costs belong in inventory, not operating expense.

Formula Landed cost = Purchase price + Freight + Insurance + Duties and tariffs + Brokerage and handling

Why it matters at $10M revenue Leaving freight and duty out of product cost overstates margin, most of all on imported or bulky goods.

LIFO (last in, first out)

An inventory cost-flow assumption in which the most recent inventory costs are charged to cost of goods sold first. Permitted under US GAAP and US tax rules, but not under IFRS.

Why it matters at $10M revenue In inflationary periods LIFO can defer tax, but it requires careful records and a tax election.

Material requirements planning (MRP)

A planning system that uses the production schedule, bills of material and inventory levels to calculate what materials to buy or make, how much and when.

Why it matters at $10M revenue MRP prevents both stockouts and excess inventory that ties up cash.

Month-end close

The process of reconciling accounts, recording accruals and adjustments, valuing inventory and producing financial statements for a month, on a defined schedule.

Why it matters at $10M revenue A close that finishes in days, not weeks, gives you numbers while they can still change decisions.

Net margin

Net income as a percentage of revenue — the share of each sales dollar left after all costs, interest and taxes.

Formula Net margin = Net income ÷ Revenue

Why it matters at $10M revenue Net margin shows whether overhead and financing are consuming the gross margin you earn.

Operating leverage

The degree to which a company’s costs are fixed rather than variable. High operating leverage means profit rises quickly with volume — and falls quickly when volume drops.

Formula Degree of operating leverage = Contribution margin ÷ Operating income

Why it matters at $10M revenue Capital-intensive plants have high operating leverage, so volume forecasts matter enormously.

Overall equipment effectiveness (OEE)

A measure of how productively equipment runs compared with its full potential, combining availability, performance speed and quality yield into a single percentage.

Formula OEE = Availability × Performance × Quality

Why it matters at $10M revenue Raising OEE adds capacity without buying a new machine.

Overhead absorption rate

The rate used to apply manufacturing overhead to products, set in advance by dividing budgeted overhead by a budgeted activity base such as labor hours, machine hours or units.

Formula Overhead rate = Budgeted overhead ÷ Budgeted activity (labor hours, machine hours or units)

Why it matters at $10M revenue A stale rate quietly misprices every product when volume or equipment changes.

Process costing

Collecting production costs by process or department and spreading them across the units produced in a period. It suits continuous, high-volume production of similar units, such as food, chemicals or plastics.

Why it matters at $10M revenue Process costing gives a reliable unit cost when individual units are indistinguishable.

Purchase price variance (PPV)

The difference between the actual price paid for materials and the standard price, multiplied by the quantity purchased or used. An unfavorable variance means materials cost more than planned.

Formula PPV = (Actual price − Standard price) × Actual quantity

Why it matters at $10M revenue PPV separates supplier and market price problems from production problems.

Quote-to-order rate

The percentage of quotes that convert into orders over a period, by count or by value.

Formula Quote-to-order rate = Orders won ÷ Quotes issued

Why it matters at $10M revenue A rate that is very high can mean you are underpricing; very low can mean your costs or quoting are off.

Routing

The sequence of operations, work centers and standard times required to make a product. Routings drive labor cost, machine-hour overhead and capacity planning.

Why it matters at $10M revenue Accurate routings are what make labor efficiency variances meaningful.

Scrap rate

The share of material or units that must be discarded because they cannot be used or reworked, expressed as a percentage of total material or production.

Formula Scrap rate = Scrapped units (or material) ÷ Total units (or material) started

Why it matters at $10M revenue Scrap is margin thrown away; even a point or two matters at $10M in revenue.

Shop rate

The hourly rate a job shop charges, or uses in quotes, for an hour of production capacity. It should recover direct labor, burden, overhead and target profit.

Formula Shop rate = (Labor + Burden + Overhead + Target profit) ÷ Productive hours sold

Why it matters at $10M revenue An outdated shop rate is the most common reason job shops win work that loses money.

Standard costing

A costing method that assigns each product a planned cost for materials, labor and overhead. Actual results are compared with standard, and the differences are reported as variances that show where purchasing, usage, rates or efficiency missed plan.

Why it matters at $10M revenue Standards make quoting fast and point directly at the cause when margins slip.

Takt time

The pace of production needed to meet customer demand: the available production time divided by the number of units customers require in that time.

Formula Takt time = Available production time ÷ Customer demand

Why it matters at $10M revenue Comparing cycle time with takt time shows whether you need overtime, another shift or more equipment.

Variable costing

A costing method that includes only variable production costs in product cost and treats fixed manufacturing overhead as a period expense. It is used for internal decisions, not external reporting.

Why it matters at $10M revenue Variable costing shows the true incremental cost of an extra order or a price change.

Weighted average cost

An inventory costing method that assigns each unit the average cost of all units available, recalculated as new purchases arrive, smoothing out price swings.

Formula Weighted average cost = Total cost of goods available ÷ Total units available

Why it matters at $10M revenue Average cost keeps unit costs stable when material prices are volatile.

Work in process (WIP)

Inventory that has entered production but is not yet finished: materials issued to the floor plus the labor and overhead applied so far. WIP is an asset on the balance sheet until the goods are completed.

Why it matters at $10M revenue Large or unreconciled WIP balances hide both cash tied up in production and costing errors.

Yield

The share of production that meets quality standards. First-pass yield counts only units that are right the first time, without rework.

Formula First-pass yield = Good units without rework ÷ Total units started

Why it matters at $10M revenue Low yield inflates real unit cost even when the standard cost looks fine.

See these terms in practice: manufacturing accounting, standard vs. actual costing and cash flow management.