Planning, Budgeting And Forecasting Flashcards
Describe the components of a simple regression equation:
Y=a+bx
Y= Dependent variable (total cost) a = "y"-intercept (fixed costs) b = slope or coefficient of independent variable (VC per unit) x = independent variable (cost driver)
Benefits and shortcomings of regression analysis
Benefits:
- Quantitative & objective
- Useful in separating mixed cost into variable & fixed for budget purposes
Shortcomings:
- Can’t be used if historical data is not available
- Is obsolete if data isn’t relevant to current situation.
What are the benefits and limitations of the Annual/Master Budget?
Benefit are it’s the most common & widely used system & easy to prepare.
Limitations is it’s a static budget designed for a single level or activity.
What are the benefits and limitations of the Project Budgeting?
Benefit is it’s focused on specific programs/projects.
Limitations are the impact on departmental services and could be too committed to project
What are the benefits and limitations of the Activity Based Budget (ABB)?
Benefit is it’s more accurate to project costs and promotes continuous improvement.
Limitations: it’s impractical if the cost outweighs the benefits, and accountants need a firm grasp of how it works.
What are the benefits and limitations of the Zero Based Budget
Benefit is a total review/focus of each line leading to a more efficient organization
Limitations are that it’s impossible/costly to do annually and is time consuming and expensive.
What are the benefits and limitations of the Continuous (Rolling) Budget?
Benefit is it’s easy to updated and adjust for new periods, reflects current events and changes and shows yr/yr analysis
Limitations include an overemphasis of the financial side, disregarding the operational issues.
What are the benefits and limitations of the Flexible Budget?
Benefit is that the actual reasons for actual & budgeted amounts can be easily apparent.
Limitations is it’s relies heavily on the accuracy of fixed/variable cots.
Describe the function of the learning cure analysis
A function that shows how labor hours per unit decline as units of production increase due to workers learning and becoming better at their jobs.
Identify the characteristics of a strategic plan
- Be in harmony with the mission
- Flexible & respond quickly to change
- Prepared by top mgmt. but be inclusive
- Understood/accepted by all levels of mgmt.
- Specific, Measurable, Achievable, Realistic, Time-bound
Describe the generic strategy: Cost Leadership
enables companies to pursue strategies that will deliver the lowest price of its products/services among its’ competitors. They enjoy higher profits due to lower costs. They must maintain quality while reducing their costs.
Describe the generic strategy: Differentiation
To distinguish products/services from other markets. Can be focused as well. Sustainability is the biggest issue.
Explain the role of the sale budget in the development of an annual profit plan
The sales budget is the starting point in the master budget prep. It’s a detailed schedule of expected sales and is the foundation of the annual profit plan. Accuracy of this budget is crucial.
Identify the factors that should be considered when preparing a sales forecast
- Industry & general economics
- Competitor’s activities affecting org’s sales
- Productive capacity
- Increase/decrease in sales prices
- Increase/decrease in costs of production
- Results of market research & feasibility studies
- Introduction of new products
- Planned advertising & marketing expenses
- Backlog of unfilled sales orders from PY
What are the two main components of the sales budget?
Projected units to be sold
Projected sales price per unit
Explain the relationship between the sale budget & production budget.
The production budget is prepared after the sales budget and is the number of units to produce to satisfy sales but take into account inventory levels.
What is the formula for the production budget
Desired ending inventory Add: Projected units sale = Goods Available for Sale Less: Beginning inventory =Production
Identify the roles that inventory plays in the prep of the production budget & other factors to consider
Timing of production - To early, to late or throughout year
Capacity restrictions - Lower capacity means buying from suppliers/outsourcing. Higher means excess capacity for alternative use.
What are the two methods to separate costs into fixed or variable?
High-Low Method:
Simple/easy but less accurate. The difference between TC of highest & lowest levels of activity / difference of activity levels to arrive @ variable cost per unit.
Regression analysis: More complex but more accurate. Solve using y = a + bx
What is the contribution margin per unit?
The sales per unit less variable expense per unit.
What is the contribution margin?
The difference between the total revenues and total variable expenses. The amount available to cover fixed operating expenses
What are the components of the selling & administrative expense budget?
- Freight out
- Salaries/Commissions of sales personnel
- Advertising & Promotion
- Human Resources
- Accounting
- Customer services
- Admin departments
How does the components of the selling & admin expense budget affect the contribution margin?
Selling & Admin expenses can be variable or fixed. Some vary directly with sales while others don’t.
What is the operational budget comprised of?
- Sale budget
- Production budget
- Direct materials usage budget
- Direct materials purchases budget
- Direct labor budget
- Manufacturing overhead cost budget
- Cost of goods sold
- Selling & admin expense budget
- Budget income statement
Explain the relationship between the capital and cash budgets and the pro forma financial statements.
The capital budget has approved projects where the cash is distributed on a monthly/quarterly basis. The funding requirements are in the cash budget and reflected on the balance sheet. The deprecation expense and accumulated depreciation expense are included in the capital budget and the financial stmts.
What is the purpose of the cash budget?
- Annual summary of the inflows, outflows and balances for a specified period of time.
- Effective for short-term planning and decision making.
- Helps determine short-term financials’ needs and investment opportunities.
Describe the relationship between the cash budget and all other budgets.
*Sales budget dictates schedule of cash collections
*(Non) Manufacturing give estimated cash pymts for operating exp
*Uses amounts from other budgets for disbursement
~ Chg in cash = Cash receipts less cash payments
What are the four cash budget inputs needed?
- Cash receipts - When cash is received/recognized
- Cash disbursements - outgoing payments
- Cash excess/deficiency - Cash in less Cash out
- Financing - source of cash that it falls below expectations.
Describe the relationship between credit and purchasing policies.
Purchasing policies affect the cash budget by delaying or hastening cash payments for purchases.
Credit policies affect the cash budget by limiting or accelerating cash receipts from the sale of goods.
The cash budget is prepared after the budgeted financial statements are created
Explain how the pro-forma statements help an organization.
1) Business Planning - compare/contrast various plans
2) Financial Modeling - achieve goals through testing goals
3) External Reporting - made available outside entity.
Identify the factors required to prepare medium & long-term cash forecasts.
- Collection policies & sales patterns
- Purchasing & payment policies
- Income tax laws
- Principal & Interest on long-term debt payments
- Fixed assets acquisition plans
- Additional debt & equity financing policy
- Dividend policy.
Describe the PEST analysis that effects an entity during the strategic planning process
Political Factors - changes in law/regulations
Economic - Interest/exchange rates, inflation, GDP
Social - Changes in values/culture of population/market
Technological - obsolete/new opportunities.
What are Porter’s 5 forces?
1) Risk of entry by potential competitors
2) Intensity of rivalry among est. companies in industry
3) Bargaining power of buyers
4) Bargaining power of suppliers
5) Closeness of substitutes to a product
Describe situational analysis for strategic planning
Compares external opportunities with internal struggles
Describe scenario planning for strategic planning
Encourages mgmt. to think of more flexible strategies under different situations
Describe competitive analysis for strategic planning
the planning process to recognize competitors and determine each competitor’s strengths and weaknesses
Describe contingency planning for strategic planning
The process building up solutions to possible events that may adversely affect the execution of the strategic plan. Prepares entity for uncontrolled threats/emergencies. Short-term planning.
Describe the BCG Growth Share Matrix
A planning tool for assigning priorities to each product in a portfolio by determining the life cycle stage of the the product.
*Star * Question Mark * Cash Cow * Dog
What is the formula to calculate the budget for purchases
Beginning Inventory \+Purchases (x) -COGS =Ending Inventory Solve for X
Describe the budget cycle
Formulate master budget & components Obtain buy in from managers Compare actuals vs budget Perform a variance analysis Make corrective adjustments Revise budget based on feedback
Explain the process of strategic planning
Always developed first by senior and top management. Then the middle-level managers can develop a tactical plan, which is typically based on the next 1-5 years. The last phase is operational planning which are short-term plans developed by middle and lower management from the tactical plans. These operational plans include budgets and drive the day-to-day operations of the business.
