4. Improving Budgets - Statistical Techniques

Question 1

What are the approaches for improving budgets?

Answer 1

1) Time series analysis
2) Linear regression
3) Index numbers

Question 2

What is a times series analysis?

Answer 2

A series of figures recorded over a period of time. Most are made up of patterns.

Question 3

What are the components of a times series?

Answer 3

Trend, seasonal variance, cyclical variance, random variation

Question 4

What is a trend?

Answer 4

Underlying long-term movement in a constant direction, over a prolonged period of time

Question 5

What is seasonal variance?

Answer 5

Predictable, recurring fluctuations over the short-term, typically over a year in duration

Question 6

What is cyclical variation?

Answer 6

Recurring patterns like seasonal variations but tend to occur over a longer period of time

Question 7

What is random variation?

Answer 7

Unpredictable fluctuations caused by random events

Question 8

What is the additive model?

Answer 8

TS = T + SV

Question 9

What is the multiplicative model?

Answer 9

TS = T X SV

Question 10

How do you de-seasonalise data?

Answer 10

T = TS - SV

Question 11

How can you use moving averages to identify trend figures?

Answer 11

1. Find the trend - three day moving average
2. Identify seasonal variations (TS-T=SV)
3. Forecasting future figures - continue the trend and apply seasonal variation

Question 12

How does linear regression help improve budgets?

Answer 12

It looks at what has happened in the past and assumes there is a reliable ‘linear’ relationship between factors.

Question 13

What is the equation for linear regression?

Answer 13

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

Question 14

What are the assumptions and limitations of linear regression?

Answer 14

> 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

Question 15

How can index numbers help improve budgets?

Answer 15

They measure the relative change in the volume or the value of an index over time

Question 16

What is the ‘base year’?

Answer 16

The starting point for the index numbers and the year that we compare every other year to.

Question 17

How do you work out the subsequent periods in index numbers?

Answer 17

(Current period figure / base period figure) X100

Question 18

What is the retail price index?

Answer 18

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’.

Question 19

What do you calculate RPI?

Answer 19

E.g. (RPI2010 (base) / RPI2011) X ‘wage’ in 2011

Question 20

What are flexible budgets?

Answer 20

When you prepare a variety of different budgets

Question 21

What is regular re-forecasting?

Answer 21

Regularly revisiting and updating budgets

Question 22

What are planning models?

Answer 22

Various software and spreadsheet models

Question 23

What is the product life cycle?

Answer 23

The stages through which individual products develop overtime. It has four stages.

Question 24

What are the stages for the product life cycle?

Answer 24

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.

Question 25

What is a census and what are its advantages and disadvantages?

Answer 25

When you look at every single item in the population.
Advantage - gain comprehensive information
Disadvantage - hugely time consuming, rarely used

Question 26

What are the types of sampling?

Answer 26

Random sampling
Stratified random sampling
Systematic sampling
Cluster sampling
Multi-stage sampling
Quota
Census

Question 27

What is random sampling and what are its advantages and disadvantages?

Answer 27

Samples are picked at random.

Advantages - quick and simple, random so should represent the whole population

Disadvantages - unrepresentative of wider pattern, entirely dependent upon the quality of sampling frame

Question 28

What is stratified random sampling and what are its advantages and disadvantages?

Answer 28

The sample frame is divided into non-overlapping groups and a random sample is picked from each.

Advantages- represents all important groups, more representative of whole population, more meaningful information

Disadvantage - prior knowledge is needed, more time consuming

Question 29

What is systematic sampling and what are its advantages and disadvantages?

Answer 29

Every nth item is taken.

Advantages - quick and easy, information is still random

Disadvantages - need access to whole population, regular patterns can cause issues, may not fully represent population.

Question 30

What is cluster sampling and what are its advantages and disadvantages?

Answer 30

When the population is divided into groups/cluster and a number of groups is selected.

Advantages - quick and cheap, non-comprehensive frame required

Disadvantages- huge potential for bias, not fully representative

Question 31

What is multi-stage sampling and what are its advantages and disadvantages?

Answer 31

Selecting a sample within each chooses cluster.

Advantages - Suits larger population, quicker to obtain sample

Disadvantages- not truly random, can be heavily biased

Question 32

What is a quota and what are its advantages and disadvantages?

Answer 32

A sample of a certain number of items is taken.

Advantages - large population can be studied, simple and cheap

Disadvantages- may not represent entire population

Question 33

How can historic data be unreliable?

Answer 33

It is old data and there is no guarantee that conditions will continue into the future.

Question 34

How can unexpected events impact the reliability of forecasts?

Answer 34

They are impossible to factor in, assumptions are dangerous and reduce forecast reliability.

Question 35

What do you need to consider when creating a forecast?

Answer 35

• How much data you have
• How reliable the data is
• Is there any data missing?
• is there any change in definition of the data?