Definitions

Question 1

Cost Allocation

Answer 1

The process of splitting up a cloud bill and associating the costs to each cost center. It’s important to have teams understand how costs are being allocated, and to have a centralized, controlled, and consistent cost allocation strategy.

Question 2

Wasted Usage

Answer 2

Resource usage that isn’t actively used by an organization. If a resource is provisioned, a cloud service provider will still charge for it—even if it isn’t used.

Question 3

Rightsizing

Answer 3

When a cloud resource is provisioned larger than is required, it’s considered oversized, such as having too much memory or compute power. Rightsizing is the act of changing the size of provisioned resources to a size that better matches needs.

Question 4

On-demand rate

Answer 4

The normal or base rate paid for a cloud resource. This is the public pricing for a cloud resource.

Question 5

Rate reduction

Answer 5

Using Reserved Instances (RI), Committed Use Discounts (CUD), or commercial agreements between an organization and a cloud service provider in order to receive a lower rate for the resources used.

Question 6

Cost avoidance

Answer 6

By reducing resource usage, either by removing the resource altogether or rightsizing it, you can avoid paying for resources that would have incurred a charge. This method of reducing cloud spend will be covered in Chapter 11. It’s important to note that there will be nothing in a billing data that actually tracks cost avoidance; it’s often measured as a reduction in the amount of cost for the current month’s billing cycle.

Question 7

Cost savings

Answer 7

By reducing the rate you pay for resources, you generate savings. Unlike usage reduction where we avoid costs, cost savings are represented in your billing data. The usage is there, but you pay a lower rate for it. Usually you can track savings in billing data, either directly by monitoring credits applied to a bill or by comparing the rate paid for a resource versus the normal public price.

Question 8

Savings realized

Answer 8

When a saving is applied to billing data, you’re able to track the amount of savings you’ve generated in your cloud bill. By tracking realized savings against the efforts in generating and maintaining them, you’re able to determine the overall effectiveness of your FinOps practices.

Question 9

Savings potential

Answer 9

When looking at your cloud bill forecasts, you can predict the amount of savings you can make using your existing commitments and commercial agreements. But, until these savings are applied to your accounts, this is only savings potential.

Question 10

Reservations/commitments

Answer 10

By precommitting to a cloud service provider a set amount of resource usage using RIs or CUDs, you receive a reduction in the rate normally paid for those resources.

Question 11

Reservations unused/untilized

Answer 11

For every hour you’ve committed to a resource usage that you don’t use, that reservation goes unused, or unutilized. Another term used for this is reservation vacancy.

Question 12

Reservation waste

Answer 12

Having a reservation with some amount of underutilization isn’t an issue as long as the discount you’re receiving is larger than the cost of the unused reservation. When the reservation is costing you more than what you would save—not being utilized to an amount that saves you more than the cost of the reservation—you call this reservation waste.

Question 13

Covered Usage

Answer 13

When a resource charge is discounted by a reservation, you call it covered. The usage is being covered by the reservation, and the result is a lower rate of charge.

Question 14

Coverable usage

Answer 14

Not all usage in the cloud is coverable with a reservation. If you have resource usage that spikes during business hours and then is removed after business hours, committing to a reservation would end up with reservation wastage and wouldn’t save money. When usage would result in savings by being covered with a reservation, classify it as coverable.

Question 15

Unblended rates

Answer 15

Some resources are charged in decreasing rates the more you use them. We’ll cover volume discounts and sustained use discounts in Part 3 of the book. It means you’re billed different rates for resources as you use more, or for longer periods during the month. By examining your bill, you can see that some resource costs are larger than others, even for the same type of resource or an identical resource. When the rates are presented this way, they’re called unblended.

Question 16

Blended rates

Answer 16

Some cloud service providers offer a blended rate in their billing data. This blended rate standardizes the rate you pay for the same type of resource by evenly distributing the charges to each resource. While some cloud service providers offer a blended rate in their detailed billing data, often the way the costs are blended is not perfectly even, or some resource costs are not blended, which can lead to confusion about the true cost of a resource.

Question 17

Amortized costs

Answer 17

Some cloud resources and reservations come with an upfront fee. The amortized cost of a resource takes this initial payment into account and divides it out, attributing the prorated cost for each hour of billing.

Question 18

Fully loaded costs

Answer 18

Fully loaded costs are amortized, reflect the actual discounted rates a company is paying for cloud resources, equitably factor in shared costs, and are mapped to the business’s organizational structure. In essence, they show the actual costs of your cloud and what’s driving it.

Question 19

Matching principle

Answer 19

Expenses should be recorded in the period in which the value was received, not necessarily during the period the cloud provider invoiced them or when payment was made. The matching principle applies to the accrual basis of accounting, and is the main difference from the cash basis of accounting. In IaaS billing, this means you should expense spending using the billing data (e.g., Cost and Usage Reports in AWS, Cloud Billing Reports in GCP, Azure Billing File in Azure) rather than using the invoices from the provider.

Question 20

Capitalized Expense (CapEx) vs Opertaional Expense (OpEx)

Answer 20

When you capitalize something, it becomes an asset of the company, whether or not it gets expensed within a specific period. The test you can apply is: if an organization writes a check to acquire something, does that acquisition benefit future periods? If it does, then it can be capitalized. If it benefits only the current period, then it’s an expense that is expended in this period with no future benefit, making it an operational expense. Capitalization causes total outlays to differ from expenses in a similar period, with the delta being that which is capitalized.

Question 21

Cost of capital/WACC

Answer 21

Cost of capital refers to the cost to an enterprise to deploy their money toward an investment. In cloud, cost of capital is an important consideration when looking at commitments like RIs. For example, if a company borrows money at 8%, then its cost of capital is 8%. That 8% becomes the bar the company needs to exceed in its return on investment. However, this 8% example is vastly simplified. In reality, most companies have a variety of sources from which they gain access to capital. Various types of debt and equity financing may bring very different rates. When doing cost of capital calculations in such a situation, companies must use a blending of those rates, called the weighted average cost of capital (WACC). Most finance teams will know what their WACC is, and must consider it when making RI purchases.

Question 22

Cost of goods sold

Answer 22

COGS measures how many dollars of outlay it takes to generate revenues in a specific period. If a power company is trucking coal out of storage and into the power plant, it would record the cost of the coal burned. It has no future benefit, so it’s going to be an expense that is directly traceable to revenue in that period, making it a COGS expense. The test of COGS is: are they directly expensed and directly related to revenues in the same period?