BAR_1B1_Budgeting, Forecasting, and Projection

Question 1

Opportunity cost

Answer 1

Net benefit lost or given up when one option is used instead of another. If there is no alternative use - opportunity cost is zero (no benefit to be lost)

Question 2

Expected value

Answer 2

Calculated by taking the:

Net profit x % probability of outcome
less
Cost incurred x % probably of negative outcome
equals to expected value

Example:
$100,000 cost for proposal
80% change of winning proposal
$250,000 Net profit

$250,000 x .80 = $200,000
-$100,000 x 0.20 = -20,000
Expected value = $180,000

Question 3

What are the 3 methods of breaking down mixed costs?

Answer 3

1. High-low (cost observed at its high and low levels of activity, difference in the two costs is then divided by the difference in activity between the two extremes)
2. Scattergraph (Graphs all observed activity points and draws a regression line based on visual inspection)
3. Least Squares (Regression line statistical)

Question 4

COGM

Answer 4

Cost of Goods manufactured = COGM less difference between Beg FG inv and Ending FG inv.

Question 5

Margin of Safety

Answer 5

Margin of safety = Budgeted Sales - Breakeven Sales

Question 6

How is Goodness of Fit measured?

Answer 6

By r-squared (r2) statistic (indicates how well data points fit in a line or curve

Question 7

Regression analysis

Answer 7

Forecasting technique most relevant for analyzing data prior to creation of a flexible budget