4. Improving Budgets - Statistical Techniques Flashcards
What are the approaches for improving budgets?
1) Time series analysis
2) Linear regression
3) Index numbers
What is a times series analysis?
A series of figures recorded over a period of time. Most are made up of patterns.
What are the components of a times series?
Trend, seasonal variance, cyclical variance, random variation
What is a trend?
Underlying long-term movement in a constant direction, over a prolonged period of time
What is seasonal variance?
Predictable, recurring fluctuations over the short-term, typically over a year in duration
What is cyclical variation?
Recurring patterns like seasonal variations but tend to occur over a longer period of time
What is random variation?
Unpredictable fluctuations caused by random events
What is the additive model?
TS = T + SV
What is the multiplicative model?
TS = T X SV
How do you de-seasonalise data?
T = TS - SV
How can you use moving averages to identify trend figures?
- Find the trend - three day moving average
- Identify seasonal variations (TS-T=SV)
- Forecasting future figures - continue the trend and apply seasonal variation
How does linear regression help improve budgets?
It looks at what has happened in the past and assumes there is a reliable ‘linear’ relationship between factors.
What is the equation for linear regression?
Y=a+bX
Y= total costs X= volume of production outputs a= the point that the line intercepts the y axis which is the fixed cost b= the slope of the line which is the variable cost per unit
What are the assumptions and limitations of linear regression?
> Observations May not be typical of normal behaviour
Historical data may not be meaningful, patters change overtime
Assumes a linear relationship between variables
predicting outside of data range is less accurate
Reliability depends on how closely data line fits best fit
Total costs not affected by changes in volume
Affected by general rates of inflation
How can index numbers help improve budgets?
They measure the relative change in the volume or the value of an index over time
What is the ‘base year’?
The starting point for the index numbers and the year that we compare every other year to.
How do you work out the subsequent periods in index numbers?
(Current period figure / base period figure) X100
What is the retail price index?
It measures the changed its the prices of items of expenditure of the average household. It can be used to inflate or deflate costs at different points in time for more meaningful comparison so costs can be compared in ‘real terms’.
What do you calculate RPI?
E.g. (RPI2010 (base) / RPI2011) X ‘wage’ in 2011
What are flexible budgets?
When you prepare a variety of different budgets
What is regular re-forecasting?
Regularly revisiting and updating budgets
What are planning models?
Various software and spreadsheet models
What is the product life cycle?
The stages through which individual products develop overtime. It has four stages.
What are the stages for the product life cycle?
1) introduction stage: high costs and low revenue so still negative in cash flow
2) growth stage: falling unit costs and increasing revenue means that products should start to become profitable
3) maturity stage: high demand and sales but growth has slowed. Reduced production costs per unit with economies of scale and increasing efficiency. Product should be highly profitable.
4) decline stage: falling demand and market share leading to the product becoming loss making.
