Financial Planning & Analysis

Question 1

What is a Static Budget?

Answer 1

Budget targeted for a specific segment of a company.

Question 2

What is a Maser 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)

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, Assigns fixed OH as product costs

Variable Costing - Internal Use, Assigns Fixed Cost as expense in period occurred

Question 9

How is Contribution Margin calculated?

Answer 9

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

Ratio: Contribution margin per unit / sales price per unit

Question 10

How is Breakeven Point (per unit) calculated?

Answer 10

Total Fixed Costs / Contribution Margin = Breakeven Point Per Unit

Assumption: Total Costs and Total Revenues are LINEAR

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

What is the sensitivity analysis?

Answer 20

“what if?” technique that asks how a result will change if the original predicted data changes or if an underlying assumption changes

Question 21

What is the the coefficient of correlation, r?

Answer 21

Part of the regression analysis.

The coefficient of correlation, r, is a measure of the relative relationship (not the variance) between the two variables

1. The dependent variable, the values that we would like to predict
2. The independent variable, the values that we would like to use in the prediction process

Range is between -1 and 1

Question 22

What is the Incremental cost approach?

Answer 22

The extra cost associated with manufacturing One additional unit. (A company has room for additional units of production)

Ignores fixed cost.

Variable manufacturing cost = incremental cost

Question 23

What is a disadvantage of the sensitivity analysis?

Answer 23

Implicit assumption that variables are independent

Question 24

In a simple linear regression model, what is the basic assumption?

Answer 24

Increase in # of units produced will increase total costs

Question 25

The high-low method is a simple technique that is used to do what?

Answer 25

Estimate the fixed and variable portions of costs, usually production costs

Question 26

What is Certainty Equivalent Adjustments?

Answer 26

It is a risk analysis technique that is based on the utility theory. It makes the decision maker stipulate between a certain amount of money and the expected value of a risky amount.

Question 27

What are the levels of interdependence that are included in integrated planning?

Answer 27

1. Pooled
2. Sequential
3. Reciprocal

Question 28

What is the Time Series Analysis?

Answer 28

Focuses on evaluation of trends over time.

Components: Cyclical fluctuations, random variations, seasonal variations and secular trends.

Question 29

What is Expected Value (EV)?

Answer 29

Estimates percentage of occurrence to estimated values such as cost or sales.

Can be used to determine the best estimate or course of action under uncertainty.

Sales x Probability = Expected Value

Question 30

The correlation coefficient indicates that the weakest linear association between two variables is?

Answer 30

The closer to zero the poorer the fit.

Note: Can be positive or negative, Best answer is smallest absolute number.

Question 31

What would cause a company’s breakeven point in sales to increase?

Answer 31

Total Fixed Costs increase. Breakeven would increase if numerator increased or denominator decreased.

Breakeven point in units = FC / contribution margin

Breakeven in units x sales price per unit = break even in sales

Question 32

When using a flexible budget, a decrease in production levels within a relevant range, will?

Answer 32

In a normal flexible budget situation (where both variable and fixed costs are present), a decrease in the level of production would be accompanied by a decrease in total costs.

Question 33

How do you calculate the number of units to produce a particular profit?

Answer 33

Number of units to produce a particular profit = (Fixed costs (FC) + Net income (NI)) ÷ (Profit (P) - Variable costs (VC))

OR

(FI +NI) / Contribution Margin