2.2

Question 1

What is a sales forecast?

Answer 1

An estimation of future sales that may be based on previous sales figures, market surveys and trends or managerial estimates.

Question 2

What does a sales forecast help to determine?

Answer 2

Budgets
Staffing levels
Production levels
Stock and purchasing levels
Cash flow forecasts 
Profit and loss forecasts

Question 3

Factors that can affect sales forecasts

Answer 3

Consumer preferences
Incomes
Inflation, exchange rare & interest rates
Changes in tax rates or legislation 
Changes in GDP
Actions of competitors 
Natural changes
Changes in costs > higher prices

Question 4

Difficulties of estimations for sales forecasts?

Answer 4

Can be inaccurate > causes difficulties for business
Further ahead forecasts are, less accurate
Most factors affecting sales forecasts are not in businesses control

Question 5

What is sales volume?

What is sales revenue?

What is total revenue?

Answer 5

Volume > the number of a specific product that was sold in a given time period.

Revenue > the income that in generated from sales of a product or service.

Total revenue > the total of all revenues earned by a business.

Question 6

Sales volume formula?

Answer 6

Sales revenue / unit price

Question 7

Sales revenue formula?

Answer 7

Selling price x sales volume

Question 8

What are fixed costs?

Answer 8

FC are costs that do not change with the level of output. E.g. rent, loan repayments

Question 9

What are variable costs?

Answer 9

VC are costs that do change with output. E.g. raw materials costs, packaging, energy bills etc

Question 10

How to calculate total costs?

Answer 10

Total fixed costs + Total variable costs

OR

Cost per unit of output x Quantity produced

Question 11

What is profit?

Answer 11

The difference between the value of the total sales revenue of a business and the total costs involved in producing that output.

Total revenue - Total costs = Profit

Question 12

What is contribution? Calculation?

Answer 12

The difference between the price of a product and its variable cost.

Contribution = selling price - variable cost per unit

Total contribution = sales revenue - total variable costs

Question 13

What is the break even point (BEP)?

Answer 13

The level out of output at which the total revenue is exactly the same as the total costs.

At the BEP:
Total fixed costs + total variable costs = total sales revenue

Question 14

How to calculate the BEP?

Answer 14

BEP = fixed costs / contribution

Question 15

What is the margin of safety?

Answer 15

The difference between the actual level of output and the break-even level of output.

Question 16

Limitations of break-even analysis?

Answer 16

Unpredictable events can occur and further ahead projections are, less reliable they become.
Based on assumptions about future events that are not always realistic.
It assumes variable costs rise steadily, but they may not. i.e. big business can use economics of scale
Assumes output will be sold at a given price > what about PED and consumer actions?

Question 17

What is a budget?

Answer 17

A financial plan for the future that sets targets to be met, the costs of achieving them and how that spending might be financed.

Question 18

Preparation of budget steps?

Answer 18

Set objectives
Use data
Prepare budget
Monitor progress
Review

Question 19

Advantages of budgets?

Answer 19

Helps to control income and expenditure.
Provides clear targets for managers.
Helps to focus on costs.
Forces managers to monitor budget and highlight waste and inefficiency.
Helps to coordinate departments
Helps to reveal areas where corrective action is neecessary

Question 20

Disadvantages of budgets?

Answer 20

Can cause resentment and rivalry as departments compete for funding
If a budget is inflexible, the business may miss opportunities
Restrictive budgets may be de-motivating
Setting budgets can be time consuming and expensive

Question 21

Preparing a budget

What is extrapolation?

Answer 21

It means assuming past trends will continue into the future. It must be used with care because changes in business condition may require adjustments to be made.

Question 22

Preparing a budget

What is zero based budgeting?

Answer 22

No budget is set and no money is allocated to cover costs. Managers must be prepared to bid for and justify spending on their departments. This forces them to examine all costs.

Question 23

Advantages of zero based budgeting?

Answer 23

Resources should be allocated more efficiently
Easier to adapt as circumstances change
Gives more flexibility in response to changes in the market or economy
Forces managers to think and plan more carefully

Question 24

Disadvantages of zero based budgets?

Answer 24

Can be more expensive
Can be more time consuming
Forceful managers may be more successful in attracting funds over those who have more worthwhile projects

Question 25

What is a variance?

Answer 25

The difference between the budgeted figure and the actual figure.

Question 26

What is an adverse variance?

Answer 26

The actual figures are worse than the budgeted ones

Question 27

What is a favourable variance?

Answer 27

The actual figures are better than the budgeted ones

Question 28

Difficulties of budgeting?

Answer 28

Sales figures can be affected by many variables in demand
Costs can both rise and fall
The economy can affect both sales and costs
Government fiscal and monetary policies may affect the business