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MI > Budging and forecasting > Flashcards

Budging and forecasting Flashcards

1
Q

Why are budgets prepared?

A

PRIME

  • Planning
  • Responsibility
  • Integration and co-ordination (goal congruence)
  • Motivation
  • Evaluation and control
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2
Q

What is a forecast?

A

A prediction of what is likely to happen in the future given a certain set of circumstances.

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3
Q

What is a budget?

A

A quantified plan of action, detailing what the organisation intends should happen in the future.

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4
Q

What is a budget committee?

A

The co-ordinating body in the preparation and administration of budgets.

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5
Q

What are the functions of the budget committee?

A
  • Co-ordination and allocation of responsibility for the preparation of budgets
  • Approval and issuing of the budget manual
  • Timetabling
  • Provision of information to aid the budgeting process
  • Communication of final budgets to managers
  • Monitoring of actual and budgeted results to assess the effectiveness of the budgeting process (controls)
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6
Q

What is the budget period?

A

The period covered by the budget. May be divided into shorter control periods so that regular comparisons can be made of the actual and budgeted results.

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7
Q

What is the budget manual?

A

A collection of instructions governing the responsibilities of persons and the procedures, forms and records relating to the preparation and use of budgetary data.

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8
Q

What may a budget manual contain?

A
  • An explanation of the objectives of the budgetary process
  • Organisational structures
  • An outline of the principal budgets and the relationship between them
  • Administrative details of budget preparation
  • Procedural matters
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9
Q

What is the start point for the budget?

A

The objective (long-term plan).

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10
Q

What is the principal budget factor?

A

The factor which limits an organisation’s activities, e.g. sales demand. May also be lack of skilled labour or raw material.

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11
Q

What is the master budget?

A

It provides a consolidation of all the subsidiary budgets and normally comprises a budgeted income statement, a budgeted balance sheet and a cash budget.

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12
Q

Is a master budget designed to change?

A

No - it could be said to be fixed.

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13
Q

What is the major purpose of a fixed budget?

A

Its use at the planning stage, when it seeks to define the broad objectives of the organisation.

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14
Q

What is the order of budget preparation?

A
  1. Set objectives
  2. Sales budget -> Finished goods inventory budget
  3. Production budget (labour budget, overheads budget)
  4. Material usage budget -> raw materials budget
  5. Material purchase budget.
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15
Q

What is a sensitivity analysis also known as?

A

A ‘what if’ analysis

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16
Q

What is the important presumption with techniques that use historical data to forecast?

A

The past will provide guidance to the future.

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17
Q

How can a linear relationship between levels of costs and levels of activity be expressed?

A

Total cost = Fixed Costs + (Variable Cost per Unit x Output)

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18
Q

What is the high-low method?

A

A technique for analysing the fixed and variable cost elements of a semi-variable cost and thus predicting the cost to be incurred at any activity level within the relevant range.

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19
Q

How would you perform the high-low method?

A
  1. Select the period with the highest volume of activity and lowest volume of activity. Calculate difference - this is the total variable cost of the difference in activity levels.
  2. Calculate variable cost per unit.
  3. Calculate fixed cost by substitution.
  4. Use y = a + bx to predict cost for a given activity level.
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20
Q

What is the major disadvantage of the high-low method?

A

It only takes account of two sets of data - this may not be representative of all the data available.

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21
Q

What is linear regression analysis?

A

A statistical technique for establishing a straight line equation to represent a set of data.

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22
Q

Why is linear regression superior to the high-low method?

A

It takes account of all sets of recorded data.

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23
Q

What are the disadvantages of the high-low and linear regression analysis methods for forecasting?

A
  • Based on the presumption that past events are a good guide of what will happen in the future
  • the quality/reliability of the linear equation derived will depend upon the correlation between the variables.
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24
Q

How may two variables be correlated?

A

Perfectly, partly or uncorrelated.

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25
Q

How can the degree of correlation be measured?

A

Using the coefficient of correlation, r.

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26
Q

What is the coefficient of determination?

A
  • r^2
  • a measure of the proportion of the change in one variable that can be EXPLAINED by variations in the value of the other variable.
  • explained by, not caused by
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27
Q

What is a time series?

A

A series of observations recorded over time. Any pattern found in the data is assumed to continue into the future and a forecast is produced.

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28
Q

What are the components of a time series?

A
  • Trend
  • Seasonal variations
  • Cyclical variations
  • Random variations
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29
Q

What is the trend in time series?

A

The long-term underlying movement in data

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30
Q

What is seasonal variation?

A

Short term patterns that occur during different periods such as rush hour during the day, weekdays during the week, or warmer months of the year.

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31
Q

What are cyclical variations?

A

Medium to long-term patterns such as economic booms and recessions.

Difficult to predict and model in practice.

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32
Q

What are random variations?

A

The product of randomness and so cannot be predicted.

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33
Q

What is the aim of calculating moving averages?

A

To remove the effect of seasonal variations for use in forecasting long-term trends.

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34
Q

How can seasonal variations be estimated?

A

Using the additive model OR the multiplicative model.

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35
Q

What is the additive model in estimating seasonal variations?

A

TS = T + SV

TS = actual time series
T = trend
SV = seasonal variation
36
Q

What is the multiplicative model for estimating seasonal variations?

A

TS = T x SV

TS = actual time series
T = trend
SV = seasonal variation
37
Q

If a trend is increasing or decreasing over time, which model produces more accurate forecasts? Why?

A

The multiplicative model.

If the trend is increasing or decreasing, it is likely that seasonal variations are too. The additive model just adds the unchanging figure to trend figures.

38
Q

Why are cyclical and random variations excluded from additive/multiplicative models?

A

Because cyclical variations are difficult to predict and random variations are impossible.

39
Q

What are the assumptions of time series analysis?

A
  • What has happened in the past will continue to happen in the future
  • A linear trend relationship exists
  • Seasonal variations are constant or proportional to trend line.
40
Q

What are data outliers?

A

Observations that are abnormal and can significantly distort the results.

41
Q

What is big data?

A

High-volume, high-velocity and high-variety information assets.
Used to identify trends that may exist in vast quantities of data.

42
Q

What does big data management relate to?

A

The storage and administration of large volumes of data in all forms.

43
Q

What are big data analytics used for?

A

To analyse the data to identify relationships, patterns and other correlations in order to improve profitability.

44
Q

What is data mining?

A

The process of sorting through data to identify patterns and relationships between different items.

45
Q

What are the benefits of big data?

A
  • Forecasting demand

- Identifying customer preferences

46
Q

What are the problems of big data?

A
  • Privacy
  • Security
  • Incorrect data
  • Lack of forecasting tools and skills analysts
47
Q

What is imposed/top-down budgeting?

A

Top management prepare a budget with little/no input from operating personnel. This is then imposed upon the employees who have to work to the budgeted figures.

48
Q

In which situations are imposed budgets effective?

A
  • Newly formed organisations
  • Very small businesses
  • During periods of economic hardship
  • When operational managers lack budgeting skills
49
Q

What are the advantages of imposed/top-down budgeting?

A
  • Enhances co-ordination and incorporation of strategic objectives
  • Effectively uses senior management experience
  • Reduces time spent on budgets
  • Decrease input from inexperienced or uninformed lower-level employees
50
Q

What are the disadvantages of top-down/imposed budgeting?

A
  • Dissatisfaction, defensiveness and low morale amongst employees
  • Budgets may be unachievable
  • The acceptance of organisational goals and objectives could be limited
  • Stifle lower-level management initiative.
51
Q

What is participative/bottom-up budgeting?

A

Budgets are developed by lower-level managers who then submit the budgets to their superiors. Budgets are based on the lower-level managers’ perceptions of what is achievable and their associated resources.

52
Q

What are the advantages of participative/bottom-up budgeting?

A
  • Increased commitment to objectives
  • Based on up-to-date information from those most familiar with the department
  • Morale and motivation is improved
  • Specific resource requirements are included
53
Q

What are the disadvantages of participative/bottom-up budgeting?

A
  • Time-consuming negotiations are required
  • Managers may introduce budget slack (overstating costs or understating revenues)
  • Can support ‘empire building’ by subordinates
  • Changes implemented by senior management may cause dissatisfaction
54
Q

What is incremental budgeting?

A

The traditional approach. Base the forthcoming year’s budget on the current year’s results modified for changes in activity levels and prices.

55
Q

In which situation is incremental budgeting a reasonable approach?

A

When the current operations are as effective, efficient and economic as they can be.

56
Q

What are the advantages of incremental budgeting?

A

It is easy to use

57
Q

What are the disadvantages of incremental budgeting?

A
  • Inefficient

- Budgetary slack is protected and carried forward

58
Q

What is zero-based budgeting?

A

Works on the principle that each budget should be prepared from the very beginning (zero).
Every item of expenditure must be justified separately to be included in the budget.

59
Q

What are the advantages of zero-based budgeting?

A
  • Obsolete or inefficient operations can be identified and removed (no budgetary slack)
  • Results in more efficient allocation of resources
  • Particularly useful when applied to discretionary costs such as marketing and training costs (e.g. you could cut costs)
60
Q

What are the disadvantages of zero-based budgeting?

A
  • Time-consuming
  • Expensive
  • May emphasise short-term benefits to detriment of longer-term goals
61
Q

What are rolling budgets (continuous budgets)?

A

Budgets are prepared more often than for the full budget period, e.g. every one, two or three months.

Each budget plans for the next twelve months so that the current budget is extended by an extra period as the current period ends.

62
Q

When are rolling budgets particularly useful?

A

During periods of uncertainty

63
Q

What are the advantages of rolling budgets?

A
  • More realistic and certain
  • Planning and control based on a more recent plan
  • Managers are forced to reassess budget regularly
64
Q

What are the disadvantages of rolling budgets?

A
  • More time, effort and money

- May demotivate managers if they can’t see the benefit

65
Q

What are product-based budgets?

A

Prepare separate budgets for each product.

66
Q

When are product-based budgets appropriate?

A

When the cost and revenue responsibilities differ for each product
When a single manager is responsible for all aspects of one product

67
Q

What are responsibility-based budgets?

A

Segregate budgeted revenues and costs into areas of personal responsibility in order to monitor and assess the performance of each part of an organisation

68
Q

When might a responsibility-based budget be demotivating?

A

When a manager is held responsible for costs and revenues over which they have no control.

69
Q

What are activity-based budgets?

A

Based on a framework of activities. Cost drivers are used as a basis for preparing budgets.

Budget for each activity is derived from:
quantity of activity’s cost driver x the appropriate cost driver rate

Requires thinking about what drivers cost and so how they can be reduced.

70
Q

What realisation does activity-based budgeting lead to?

A

That the business as a whole needs to be managed with more reference to the behaviour of activities and cost drivers identified.

71
Q

What is the disadvantage of using incremental budgeting for costs not directly related to production?

A

It assumes that all of the cost is unaffected by any form of activity level, which is often not the case.

72
Q

What is beyond budgeting?

A

Suggests that budgets should be more adaptive and agile. This can be achieved through leadership principles and management processes.

73
Q

What are the leadership principles associated with beyond budgeting?

A
  • PURPOSE - engage and inspire around bold/noble causes
  • VALUES - govern through shared values
  • TRANSPARENCY - make information open and don’t restrict it
  • ORGANISATION - cultivate a strong sense of belonging, accountable teams
  • AUTONOMY - trust people with freedom to act
  • CUSTOMERS - connect work with customer needs, avoid conflicts of interest.
74
Q

What are the management processes associated with beyond budgeting?

A
  • RHYTHM - organise management processes dynamically around rhythms and events (not just calendar year)
  • TARGETS - set directional, ambitious and relative goals, avoid fixed targets
  • PLANS AND FORECASTS - make planning and forecasting lean and unbiased (not rigid/political)
  • RESOURCE ALLOCATION - foster cost-conscious mind-set and make resources available as needed
  • PERFORMANCE EVALUATION - evaluate holistically with peer-feedback for learning and development
  • REWARDS - reward shared success against competition.
75
Q

Why must users of information produced by data analytics take steps to ensure the analysis is reliable, and apply professional scepticism?

A
  • There may be bias inherent in the data that is analysed (intentional/unintentional)
  • Data may have been intentionally manipulated during analysis
  • Data may have been accurately analysed, but the presentation or data or the conclusions drawn from it may be flawed or designed to mislead users.
76
Q

What is self-selection bias?

A

An individual decides whether or not to respond to a survey. Decision is driven by their point of view.

77
Q

What is self-selection bias?

A

An individual decides whether or not to respond to a survey. Decision is driven by their point of view.

78
Q

What is omitted variable bias?

A

A variable is excluded from the data model and therefore the cause of a change in one variable is incorrectly attributed to another variable in the model.

79
Q

What is cognitive bias?

A

Relates to human perception and includes bias depending on how data is presented (the ‘framing effect’) and ‘anchoring’ (being influenced by the first piece of info offered).

80
Q

What is confirmation bias?

A

Occurs when people see data that confirms their beliefs and ignore data that disagrees with their beliefs.

81
Q

What is selection bias?

A

Occurs when data is not selected randomly and leads to a sample that is not representative of the population.

82
Q

What is observer bias?

A

Occurs when observing and recording results, and relates to interpretation. Researcher allows their assumptions to influence their observations.

83
Q

What is survivorship bias?

A

The tendency towards studying successful outcomes while excluding unsuccessful outcomes (e.g. only asking repeat customers to participate in a survey).

84
Q

How might data bias enter algorithms?

A
  • Algorithm may be trained on biased data

- Humans create rules with implicit biases

85
Q

How may bias occur when data is presented graphically?

A

By:

  • manipulating axes on a graph or bar chart
  • omitting some data

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