Projection and Forecasting Techniques Pt. 1 Flashcards
T/F: projections serve as the precursor to actual forecasts
True; they are typically prepared for internal use and can assist managers in making decisions regarding products, acquisitions, revenues, expenses, etc.
What is sensitivity analysis?
the process of experimenting with different parameters and assumptions regarding a model and cataloging the range of results to view the possible consequences of a decision; these models often use probabilities to approximate reality
the biggest drawback is that variables are independent; the reality is that variables do not typically operate in a vacuum, and a change in one will often result in changes in others that are difficult to predict with accuracy
What is scenario analysis?
in preparing for future periods, managers may prepare multiple different scenarios which represent alternative possible outcomes; budgets will be prepared under each scenario and then probabilities may be assigned in order to come up with weighted totals
What is forecasting?
it is driven by historical data and actual expectations rather than hypothetical scenarios; projections are typically used internally, and forecasts are prepared for both internal and external audiences
forecasting techniques generally can be broken out into qualitative and quantitative methods; qualitative forecasts are based on the opinions and judgment of management and other experts and do not require historical data; quantitative forecasts use historical data and are categorized as either time series methods or causal methods; time series methods use past trends to predict future variables and causal methods are based on cause-and-effect relationships between variables
forecasting (probability/risk) analysis is an extension of sensitivity analysis
What is linear regression?
a method for studying the relationship between two or more variables; simple regression involves only one independent variable while multiple regressions involve more than one independent variable
y = a + Bx
y = the dependent variable (the variable we are trying to explain)
a = the y-axis intercept of the regression line
B = the slope of the regression line
x = the independent variable (the regressor)
the coefficient of correlation (r) - the range of “r” is from -1 to 1; it measures the strength of the linear relationship between the independent variable (x) and the dependent variable (y); in standard notation, the coefficient of correlation is “r”
perfect positive correlation (1): the variables move together in the same direction
perfect negative correlation (-1): the variables move in equivalent opposite directions
no correlation (0): the variables are not related in a linear fashion
the coefficient of determination (R^2) - the proportion of the total variation in the depend variable (y) explained by the independent variable (x); its value lies between 0 and 1; the higher R^2, the better the fit of the regression line
What is the high-low method?
a simple technique that is used to estimate the fixed and variable portions of cost, usually production costs; divide the difference between the high and low dollar total costs by the difference in high and low volumes to obtain the variable cost per unit
What is the flexible budget formula?
total cost = fixed cost + (variable cost per unit * number of units)
it is used to estimate total cost at any volume
What is learning curve analysis?
based on the premise that as workers become more familiar with a specific task, the per-unit labor hours will decline as experience is gained and production becomes more efficient
it is used to set standards and to project costs; it order for this analysis to be applied, the activity itself must be repetitive in nature, involve intense labor, and have little to no labor force turnover or breaks in production
the calculation begins with the first unit/batch; as cumulative production doubles (from one unit to two, to four, to eight, etc.), cumulative average time per unit falls to a fixed percentage (the learning curve rate) of the previous average time…you are given a percentage to start, but that percentage is only used on the first unit to calculate a new percentage which is then used on the next set of numbers (however, the learning curve percentage is used in every calculation)
