5. Budgeting Concepts Flashcards
What is budgeting manual
A colleciton of instructions governing the responsibilities, procedures and records relating to the use and preparations of budgetary process
What are the functions of the budget comittee
- Co-ordination
- Issueing timetables
- Allocation of responsbilities
- Provision of information
- Communication of budgets
- Comparison of actual
- Continuous assessment
What is meant by departmental/funcitonal budget
- Budget of income/expenditure applicable to particular funciton
eg.
production cost, marketing, R&D budget
Principle budget factor
- The factor that limits the activities of an organisation
eg.
sales demand, machine capacity, availability of raw materials, availability of cash
What is the formula to prepare budgets for production and purchases
Sales + closing inventory (FG)- opening inventory (FG) = production
= usage
+ Closing inventory (RM) - opening inventory(RM) = purchases
What is the formula to work out cash recieved from reciveables
Recievables bought forward forward + sales - (recievables carried forward) = cash recieved
What is the formula for total cost fucntion for high low method
Y =a + bx
Y= total cost
a =fixed cost (intercept)
b= variable cost per unit (gradient)
x= output
What is the limitation of high low method
Uses onl two historical sets of data for predicting future value
Explain the formula for linear regression
Y= a + bx
- y= dependent variable y
independent variable =x
WHat is meant by regression analysis/ methhod of least squares
Accruate technique for estimating a line of best fit
Formula for method of least squares
b= nExy - ExEy/NEx^2 - (Ex)^2
b = (number of x )(sum of xy) - (sum of x)(sum of y)/
(number of x)(sum of (x squared)) - (sum of x) squared)
A= y - bx
a = average of y - v x average x
When is the reliability of regression line strong
If the points of data are close
- depends of degree of correlation
What are the degrees of correlation
- Perfectly correlated positive(+), negative (-)
- Partly correlated
- Uncorrelated
- Non linear correlationW
What is meant by coefficient of determination
If two variables are well correlated this may be due to chance or due to reason
= Correlation coefficient squared
What is the term for using line of best fit line to predict values
- Interpolation: predicting value within two observed points
- Extrapolation: using line of best fit to predict data outside two observed points
What are the limitations of linear regression
- Assumes straight lien relationship
- Only measures between two variables
- Forecasts are only reliable as interpolation
- high values of r/ r^2 does not neccessarily mean causation
- assumes past will predict future
- inflation is ignored unless data is adjusted using index
What are the components of time series
- Trend: underlying increase or decrease in demand
- Seasonal variations: short term repeated fluctuations in trend
- Cyclical variations: recurring patterns over a longer period of time
- Random variations: non-recurring variations caused by unforeseen circumstances
What are the two models for time series
- Additive model: assumption that seasonal variation is fixed and componenets are independent
- Multiplicative: seasonal variation is constant proportion of the trend
What is the formula for additive model
TS = T + SV
SV = TS - T
TS = time series , T= trend
What is formula for multiplicative model
TS = T x SV
SV = TS/TW
What are the three ways to find trend
- High low
- Linear regression
- Moving averages
What is meant by moving averages
Average of the results of a fixed number of periods
What are the advantages and disadvantages of time series
Advantages:
- Reflects underlying patterns
- SImple and cheap
- Can be developed into a more complex model
Disadvantages:
- Assumes all changes are time related
- Equal weight given to all data regardless of age
- How reliable is past data?
- Extrapolation is risky
What are the problems with forecasting
- Not enough data to base forecast
- Pattern may not continue
- Random variations
- Data outliers
- Missing data
What external changes are likely to affect forecasting future events
- Political (interest rates, inflation, exchange rates)
- Environmental
- Social changes (changes in taste, social acceptance)
- Technological changes (faster machinary)
- Technological advances ( advanced manufacturing reducing labour costs)
What is sensitivity analysis
A modelling and risk assessment procedure in which changes are made to significant variables to determine effect of changes on planned outcome
eg. what if analysis
What is meant by stress testing
- Computer generated simulation technique used in banking to assess impact of what if to quantify risks
- using extreme one off events eg. cybersecurity attack
What are the features of big data
4 Vs:
Volume: amount
Velocity: real time speed
Veracity: clean and reliable
Variety: sources and unstructured
What are the uses of big data
- Identify opportunities to increase effciency
- Developing and maintain KPIs
- Improving the quality fo forecasting
- Monitoring external risks
- Increasing revenues through better marketing
