Financial Planning

Question 1

What is a Static Budget?

Answer 1

Budget targeted for a specific segment of a company.

Question 2

What is a Master Budget?

Answer 2

Budget targeted for the company as a whole

Includes budgets for Operations and Cash Flows

Includes set of budgeted Financial Statements

Question 3

How do Fixed Costs affect budgeting?

Answer 3

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. less 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

You can figure fixed cost dollars from the Sales Dollars percentage of e.g. if sales are $900,000 and SP PU IS $20 AND FCPU are $10 you can say $450,000 are FCs
$8 is the VC for $20 SP

Formula $20X -8X-$450,000 = 0
Solve for X 12X = 450,000
X or breakeven is $37,500

Question 11

What is the focus in a Cost Center?

Answer 11

Management is concerned only with costs

Question 12

What is the focus in a Profit Center?

Answer 12

Management is concerned with both costs and profits

Question 13

What is the focus in an Investment Center?

Answer 13

Management is concerned with costs- profits- and assets

Question 14

What is the Delphi technique?

Answer 14

Forecasting technique where Data is collected and analyzed

Requires judgement/consensus

Question 15

What is Regression Analysis?

Answer 15

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

Forecast sales using Economic Data

Question 17

What are Naive Forecasting Models?

Answer 17

Very Simplistic

- Eyeball past trends and make an estimate

Question 18

How does a Moving Average compare to Exponential Smoothing?

Answer 18

Both project estimates using 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

Question 20

Duration of Treasury Bills, Notes, Bonds

Answer 20

Bills less than 1 year - Short-term
Notes less than 10 years - Medium term
Bonds greater than - 10 Long term

Question 21

Commercial Paper

Answer 21

Similar to T-Bill but it is issued by a large corporation versus the government,

Less than 9 months maturity

Unsecured.

Question 22

Advantages of Commercial Paper

Answer 22

Advantages:
Financing less than Prime
No Compensating Balances required

Disadvantages:
Unpredictability of markets
Credit crisis emerges and large insurance/investment companies stop lending

Question 23

Inventory Re-order Point

Answer 23

Is How low should you go before is should be reordered?

Formula:
Avg Daily Demand x Avg Lead Time

where Demand = Sales
Lead Time = Wait time Inventory Shipmemt

Question 24

Cost of Foregoing Trade Discounts using 1/10 net 30

and 2/10 net 30

Answer 24

(Disc % x 365)/(100%- Disc %) multiply this
by (Pay Period less Disc Period)

so 1/10 Net 30 is

Numerator:
1% x 365 = 3.65

Denominator:.
(100%-1%) x 20 or 19.8

3.65/19.8 = 18.43%

2/10 net 30 is

7.3/19.6 = 37.24%

Question 25

Prime Rate

Answer 25

Benchmark for lending to best customers Most customers are charged Prime + x

Question 26

Nominal Rate

Answer 26

aka Face/Coupon/Stated Rate any of these are all the same..

Question 27

Current Yield

Answer 27

Interest Payment / Bond Price

Question 28

Three disadvantages of common stock

Answer 28

1. more expensive to issue
2. no tax deductibility
3. investors demand greater ROI than debtors

Question 29

Transfer Pricing three pricing alternatives?

Answer 29

1. Cost-based price - may consider
   Variable MFG costs
   Total Mfg (absorption) costs
   or full product costs
2. Market price - this method is justified if a competitive market exists for product/service. May be based on outside customers pricing.
3. Negotiated price - should involve a floor and ceiling. a bargaining processcan use dual transfer pricing to enhance cooperation between divisions.