Financial Planning

Question 1

What is a Static Budget?

Answer 1

Static budget is budget targeted for a specific segment of a company.

Question 2

What is a Master Budget?

Answer 2

Master Budget is budget targeted for the company as a whole.

It includes:

  - budgets for operations and cash flows
  - set of budgeted financial statements

Question 3

How do Fixed Costs affect budgeting?

Answer 3

Fixed costs are costs independent of the level activity within the relevant range.

Property Tax is the same whether you produce 100-000 units or zero units.

However, Fixed Costs per unit vary given the amount of activity.

If you produce fewer units, fixed costs per unit will be greater than if you produce more units - i.e. fewer units to spread the cost over.

Question 4

How do Variable Costs affect budgeting?

Answer 4

The more Direct Materials or Direct Labor used the more Variable Costs per unit.

However, Variable Costs per unit don’t change with the level of activity like Fixed Costs per unit.

Question 5

How are Material Variances calculated?

Answer 5

SAM

Standard Material Costs - Actual Material Costs = Material Variance

Question 6

How are Labor Variances calculated?

Answer 6

SAL

Standard Labor Costs - Actual Labor Costs = Labor Variance

Question 7

How are Overhead Variances calculated?

Answer 7

OAT

Overhead Applied - Actual Overhead Cost = Total Overhead Variance

Question 8

How does Absorption Costing compare to Variable Costing?

Answer 8

Absorption Costing

• External Use
• Cost of Sales
• Gross Profit
• SG&A

Variable Costing

• Internal Use
• Variable Costs
• Contribution Margin
• Fixed Costs

Question 9

How is Contribution Margin calculated?

Answer 9

Sales Price (per unit)
- Variable Cost (per unit)
= Contribution Margin (per unit)

Question 10

How is Break-even Point (per unit) calculated?

Answer 10

Total Fixed Costs / Contribution Margin (per unit) = Break-even Point Per Unit

Assumption: Total Costs & Total Revenues are LINEAR

Question 11

What is the focus in a Cost Center?

Answer 11

In a Cost Center, management is concerned only with costs.

Question 12

What is the focus in a Profit Center?

Answer 12

In a profit center, management is concerned with both costs and profits.

Question 13

What is the focus in an Investment Center?

Answer 13

In an Investment Center, management is concerned with costs, profits, and assets.

Question 14

What is the Delphi technique?

Answer 14

Delphi technique is a forecasting technique where data is collected and analyzed. This technique requires judgement/consensus.

Question 15

What is Regression Analysis?

Answer 15

Regression analysis is a forecasting technique where sales is the dependent variable.

  - Simple Regression - One independent variable
  - Multiple Regression - Multiple independent 
    variables

Question 16

What are Econometric Models?

Answer 16

Econometric models forecast sales using economic data.

Question 17

What are Naive Forecasting Models?

Answer 17

Naive Forecasting Models are simplistic (i.e. “naive” and not sophisticated like other forecasting models):

Look at past trends and make an estimate.

Question 18

How does a Moving Average compare to Exponential Smoothing?

Answer 18

Similarity: Both Moving Average and Exponential Smoothing use average trends from recent periods.

Difference: Exponential Smoothing weighs recent data more heavily.

Question 19

What are the characteristics of Short-term Cost Analysis?

Answer 19

• Uses Relevant Costs
• Only Ignore Sunk Costs
• Opportunity Cost is a Must