Budgeting and Forecasting Flashcards
A detailed quantitative plan for acquiring and using financial and other resources over a specific period.
Budget
Involves developing objectives and preparing various budgets to achieve those objectives.
Planning
A management function that ensures the attainment of the company’s goals.
Control
The period for which a budget is prepared and used.
Budget period
It ordinarily covers a one year period corresponding to the company’s fiscal year.
Operating Budgets
It is a collection of instructions governing the responsibilities of persons and the procedures.
Budget Manual
Person who prepares sales budget.
Manager
Sales Manager
Person who prepares production budget.
Manager
Production Manager
Person who prepares direct materials budget.
Manager
Purchasing Manager
People who prepare their individual production, administration, and distribution cost center budgets for cost centers.
Manager
Cost Center Heads
Person who consolidates all the budgets and then prepares the cash budget, budgeted income statement, and budgeted balance sheet.
Manager
Finance Manager
Responsibilities of the budget committee
Budget Coordination and Administration
It is often assisted by a budget officer, typically an accountant.
Budget Committee
A budget of income and/or expenditure applicable to a particular function.
Departmental/Functional Budget
Parts of a Functional Budget
Production Budget
Sales Budget
Purchasing Budget
Personnel Budget
Step-by-step budgeting procedures
- Identify Principal Budget Factor (typically sales)
- Prepare a Sales Budget
- Prepare an Ending Inventory Budget
- Prepare a Production Budget
- Prepare a Direct Materials, Direct Labor, and Overhead Budget
- Prepare the Cash Budget
- Prepare the Master Budget
It sets the limit for an organization.
Sales Volume
Factors that must be considered when preparing a sales budget
Past Sales Performance
Seasonal Fluctuations
Market Trends
Market Research on sales price of the industry
Additional Resources that must be considered in a sales budget
Production capacity
Availability of raw materials
Financial capacity to support capital expenditures and raw materials
What should be considered when preparing the production budget?
Existing inventory level
It is usually based on the current inventory level.
Beginning Inventory
It will be used to compute the number of units produced.
Finished Goods Inventory
It will be used to compute the number of materials to be purchased.
Raw Materials Inventory
It determines the number of work hours to produce or manufacture the items.
Direct Labor Budget
It depends on the sales budget since it dictates how many units should be produced.
Production and Direct Materials Budget
Estimated every planned expense incurred while producing the goods or services.
Overhead Budget
Refers to managing a company’s cash inflows and outflows over a specified period.
Cash Budget
Determines if the organization has enough cash and cash equivalents to cover its operating requirements in the short term.
Cash Budget
A key planning tool that summarizes the company’s financial situation.
Master Budget
Used to prepare sales, production, materials, labor, and overhead budgets.
Forecasting Techniques
What to do before using Forecasting Techniques?
Assess the past data for accuracy and appropriateness for its intended purpose.
What to do to make a good forecast?
Methods of data collection must be fair.
Three types of Forecasting Techniques
- High Low Method
- Linear Regression
- Time Series Analysis
Linear Equation in the High-Low Method
y = a + bx
y = total cost
a = fixed cost
b = variable cost
x = output
It requires information on costs incurred at various levels.
WHigh-Low Method
What graph could be used to show the relationship between two variables?
Scatter Graph
It is also known as Method of Least Squares
Regression Analysis
It is a more accurate technique to estimate the line of best fit.
Regression Analysis
Formula for the value of b in the straight-line expression
b= ((n∑xy) - (∑x)(∑y)) / (n∑x^2) - (∑x)^2
Formula for the value of a in the straight-line expression
a = ȳ - bx̄
It can be used to evaluate the strength of the relationship.
Linear Regression
It is also known as the line of best fit
Regression Line
It is the determining of how close the plotted dots are to the line.
Degree of Correlation
It can be measured by computing the correlation coefficient (r)
Degree of Correlation
If the value r is closer to -1 or 1, what relationship is there?
Stronger Relationships
If the value r is near 0, what relationship is there?
Weaker Relationships
It is using a line of best fit to predict a value within two extreme points of a given range.
Interpolation
It uses a line of best fit to predict a value outside two extreme points.
Extrapolation
What is the general rule in the interpolation and extrapolation?
Interpolation is generally considered safer than extrapolation.
It records a series of figures or values over time.
Time Series
It is the graph of a time series.
Histogram
Four Components of a Time Series
Trend
Seasonal Variations or Fluctuations
Cyclical Variations or Cycles
Random Variations
Formula of Additive Model as Time Series
TS = T + SV
TS = actual Time Series
T = trend series
SV = seasonal component
Three Ways to Find the Trend
High Low Method
Linear Regression
Moving Average
It is an average of the results of a fixed number of periods.
Simple Moving Average
Companies use it to build business models to assist the forecasting and planning process.
Spreadsheet
It is performed to see the impact of changes in assumptions.
‘What If’ Analysis or Sensitivity Analysis
Performed to quantify risks of an organization as part of its risk measurement exercises.
Stress Test
It refers to the information that societies generate each year.
Big Data
Four Vs of Big Data
Variety
Velocity
Veracity
Volume
