Projection & Forecasting Flashcards
Show multiple hypothetical scenarios and courses of action
Projections
Is a risk management tool that experiments with different parameters and assumptions to determine which variables are the most sensitive to change
Sensitivity analysis
Ridge company projects the following scenarios for revenue:
30% likely - 5% sales growth
20% likely - 5% sales decline
50% likely - no growth/decline
If sales were previously $40M, project the sales for next year:
(30% X 5%) + (20% X -5%) + 0 = .5% growth
.5% X 40,000,000 = 200,000
200,000 + 40,000,000 = 40,200,000
Driven by historical data and actual expectations and is prepared for both internal and external users. Can be broken out into qualitative or quantitative methods:
Forecasting
Explains the variation in dependent variable as a linear function of one or more independent variables:
Regression analysis
Formula used for regression analysis:
Y = a + Bx
Measures the strength of the linear relationship between the independent variable (x) and the dependent variable (y):
Coefficient of correlation
Management’s expectation is that the correlation coefficient will be:
Between 0 - 1 (negative 1 is great, but unlikely)
The proportion of the total cariation between the dependent variable (y) explained by the independent variable (x)
Coefficient of determination (R^2)
Formula to calculate the variable cost per unit:
Change in total cost / change in total volume
Series of budgets that are prepared for a range of activity levels rather than a single activity:
Flexible budget
As workers become more familiar with a specific task, the per-unit labor hours will decline. Variable cos per unit should decline until a steady state period is achieved. The activity must be repetitive in nature, involve intense labor, and have little to no labor force turnover or breaks in production.
Learning curve
The interceptor on the Y axis of a regression analysis represents
The fixed cost
Forecast profits at different levels of sales and production volume
Cost-volume profitanalysis
Equation for what approach is below?
Revenue - COGS = Gross Profit Margin - operating expense =Net income
Absorption approach
Equation for what approach is below?
Revenue - Variable Costs = Contribution Margin - Fixed costs = Net Income
Contribution approach
Contribution margin ratio is
(Revenue - variable costs) / Revenue
If units produced exceed the units sold, the operating income would be higher under what method? Absorption or Contribution?
Absorption
If units sold exceed the units produced, the operating income would be higher under what method? Absorption or Contribution?
Contribution
Formula for breakeven point in units
Total fixed costs / Contribution margin per unit
Contribution margin = SP - Variable cost
Formula for breakeven point in dollars
Unit price X breakeven point in units
OR
Total fixed costs / contribution margin ratio
Contribution margin ratio = CM/SP
Formula for sales units needed to obtain a desired profit
(Fixed costs + pretax profit) / Contribution Margin per unit
Formula for sales dollars needed to obtain a desired profit
Variable costs + fixed costs + pretax profit
OR
(Fixed costs + pretax profit)/Contribution Margin Ratio
Formula for predicting profits based on volume
Units above breakeven point X Contribution Margin per Unit
Formula for setting selling prices based on assumed volume
(Fixed costs + variable costs + pretax profit) / Number of units sold
Formula for finding the margin of safety (the excess of ales over the breakeven sales)
Total sales in dollars - breakeven sales in dollars
Formula for finding the margin of safety percentage
Margin of safety in dollars / total sales
Formula for calculating the target cost:
Market price - required profit
Main differences between Absorption Approach and the Contribution Approach (variable costing):
Absorption approach: is GAAP, takes into account inventory and includes fixed and variable costs in its Gross Profit.
Contribution approach (variable costing): is NOT GAAP, does not take into account inventory and only includes variable costing in its Contribution Margin.
