4. Planning Techniques

Question 1

Budgeting: what is the master budget?

Answer 1

• a comprehensive plan for the overall activities of a company
• developed for a specified level of activity
• a static budget

Question 2

Budgeting: what is a static budget?

Answer 2

a budget that does not change when actual sales differ from planned sales.

Question 3

Budgeting: what are 3 components of a master budget?

Answer 3

1. Operating budget
2. Financial budget
3. Capital expenditures budget

Question 4

Budgeting: Operating budget: what does it do?

Answer 4

Forecasts the results of operations: sales, production expenses, and selling and administrative expenses.

Question 5

Budgeting: Operating budget: what are 4 principal budget?

Answer 5

• Sales budget
• Production budget
• Production cost budget (direct materials, labor, OH budget)
• Selling and administrative expense budget

Question 6

Budgeting: Financial budget: what does it do?

Answer 6

Forecasts cash flows and projects the financial statements that will result from operations.

Question 7

Budgeting: Financial budget: what budgets does it include?

Answer 7

• Cash budget
• Budgeted (or pro-forma) income statement
• Budgeted (or pro-forma) balance sheet

Question 8

Budgeting: Capital expenditures budget: what does it do?

Answer 8

Projects expenditures related to the acquisition or construction of capital (fixed) assets.
*Often multiple fiscal periods

Question 9

Budgeting: Operating budget: 1st step?

Answer 9

Sales forecasts:
based on information obtained from both internal and external sources and provides estimates of sales in dollars and in units.

Question 10

Budgeting: Operating budget: 2nd step - sales budget: what does it do?

Answer 10

Forecasts planned sales in dollars and in units, usually on a monthly or quarterly basis.

Question 11

Budgeting: Operating budget: 3rd step - production budget: what does it do? Based on?

Answer 11

Projects the production quantities needed to support sales and provide for the specified quantity of ending inventory.
Based on:
*unit sales info from the sales budget
*current inventory level
*desired ending inventory level

Question 12

Budgeting: Operating budget: 4th step - production costs budget: Prepared for? Based on?

Answer 12

For: a direct materials budget, a direct labor budget, an overhead budget.
Based on:
*unit production info from production budget
*for direct materials, info about current and desired ending inv levels

Question 13

Budgeting: Operating budget: 5th step - selling and admin expense budget: what does it do? Based on?

Answer 13

Lists the budget expenses for areas outside of manufacturing.
Based on individual dept managers as approved by management or by use of the percentage of sales method (the expense amount by expressing the expense as a “percentage of sales”)

Question 14

Budgeting: Financial budgets: what does it do?

Answer 14

Projects cash receipts, cash disbursements, and ending cash balance.

Question 15

Budgeting: Financial budgets: how does it project?

Answer 15

By analyzing;
*Anticipated operating receipts: from sales budget, historical info about customer pmt characteristics
includes;
- cash sales and credit sales/AR collections

*Anticipated operating expenditures: from production costs budgets, selling and admin expense budget, company’s vendor and employee policies
includes;
- cost and expenses, purchase on account/AP disbursements

*Anticipated capital expenditures; provides info on planned expenditures for capital assets

Question 16

Budgeting: Financial budgets: 2nd step?

Answer 16

The amount of cash that must be borrowed or may be invested is determined.
Based on minimum cash balance requirements specified by management.

Question 17

Budgeting: Financial budgets: 3rd step?

Answer 17

Budgeted financial statements (pro forma income stmts and pro forma balance sheet) - project the result of operation and financial position at the end of the period.
*use info from operating budget, cash budget, capital expenditures budget

Question 18

Budgeting: what is participative budgets? Benefits?

Answer 18

Allow subordinates to participate in establishing budget targets.

• can increase the accuracy of the budget by providing additional information that subordinates bring to the table
• can increase perceptions of ownership of the budget targets on behalf of the subordinates

Question 19

Budgeting: what is strategic budgeting? What are issues considered?

Answer 19

A long-range view to planning based on the identification of action plans to achieve the company’s goals and, ultimately, its mission.

• A comprehensive internal/external analysis
• Competitive/economic analysis
• An assessment of various type of risk

Question 20

Budgeting: what is a rolling budget? Who often uses it?

Answer 20

An incremental budget that adds the current period and drops the oldest period.
*Kaizen type companies - deemphasize past performance - results are “expected” to continuously improve

Question 21

Budgeting: what is Zero-base budgeting?

Answer 21

A process of starting over each budget period and justifying each item budgeted

• Requires additional work
• May be more accurate
• Forces managers to carefully think about expenditures

Question 22

Budgeting: what is budgetary slack?

Answer 22

Occurs when managers attempt to build in a cushion for spending and revenue in case targets are not met.

Question 23

Budgeting: what is Flexible budget?

Answer 23

Adjusts revenues and some costs when actual sales volume is different from planned sales volume.
- Reflect the actual level of sales activity.

Question 24

Budgeting: Flexible budget: what are common adjustments?

Answer 24

• Revenue is adjusted by multiplying the actual quantity times the sales price
• Total variable costs are adjusted by multiplying the actual quantity times the variable cost per unit
• Total fixed costs remain the same as long as volume remains within a relevant range

Question 25

Budgeting: what are differences between the flexible budget and the master budget called?

Answer 25

Sales activity variance or volume variances.

Question 26

Forecasting techniques: what is probability analysis?

Answer 26

Determine the likelihood of a specific event occurring when several outcomes are possible.

Question 27

Forecasting techniques: what is probability of a particular outcome? The sum of the probabilities associated with the possible outcome?

Answer 27

Always between 0 (never) and 1 (always). Always 1 (A sum less than one indicates that an outcome has been omitted from the analysis or a probability has been improperly assessed.)

Question 28

Forecasting techniques: what is the expected value? How is it computed?

Answer 28

Long-run average outcome. | By calculating the weighted average of the outcomes = Value of each outcome x its probability and add all.

Question 29

Forecasting techniques: what is joint probability? How is it computed?

Answer 29

The probability of an event occurring given that another event has already occurred. *The probability of the first event x The conditional probability of the second event

Question 30

Forecasting techniques: Joint probability: what are steps?

Answer 30

1. For each combination of events, the probability of the first event x the conditional probability of the second event 2. Sum the results from step 1 3. Determine the probability of a particular event combination occurring = each result for each event combination / the total of all event combinations 4. Sum the probabilities for each event combinations to ensure the total is 1 (or 100%)

Question 31

Forecasting techniques: what is variance analysis?

Answer 31

Measures the dispersion of values around the expected value (the mean or average value).

Question 32

Forecasting techniques: Variance analysis: what does smaller variance mean? How does it look on a graph?

Answer 32

Associated with less risk. | More tightly clustered.

Question 33

Forecasting techniques: what is correlation analysis?

Answer 33

Measures the strength of the relationship between two or more variables.

Question 34

Forecasting techniques: correlation analysis: what are 2 types of variables?

Answer 34

* A dependent variable: A value that changes in response to changes in related value * An independent variable: Values that change, but not in response to changes in other variables in the equation

Question 35

Forecasting techniques: correlation analysis: what is R?

Answer 35

The correlation coefficient: measures the strength of the relationship between the dependent and independent variables. *can have values from -1 to 1. 1 = perfect positive correlation (x increases, so does y) -1 = perfect negative correlation (x increases, y decrease) 0 = no correlation (y value can't be predicted from x)

Question 36

Forecasting techniques: correlation analysis: what is R2 (R-squared)?

Answer 36

The coefficient of determination: indicates the degree to which the behavior of the independent variable predicts the dependent variable.

Question 37

Forecasting techniques: correlation analysis: How is R2 (R-squared) computed?

Answer 37

Squaring the correlation coefficient. | Value from 0 to 1.

Question 38

Forecasting techniques: correlation analysis: R2 (R-squared): what does it mean when R2 is closer to 1?

Answer 38

The better the independent variable predicts the behavior of the dependent variable.

Question 39

Forecasting techniques: Regression analysis: what is it?

Answer 39

Predicts the value of one factor (the dependent variable) based on the value of one or more other factors (the independent variables).

Question 40

Forecasting techniques: Regression analysis: what is simple regression and multiple regression?

Answer 40

Simple: one independent variable Multiple: several independent variable

Question 41

Forecasting techniques: Regression analysis: what type is often used in cost accounting to evaluate the strength of the relationship between cost and cost drivers?

Answer 41

Linear regression analysis.

Question 42

Forecasting techniques: Regression analysis: does it establish cause and effect?

Answer 42

No, only indicates a relationship.

Question 43

Forecasting techniques: Regression analysis: equation?

Answer 43

y = A + Bx ``` A = the y-intercept B = the slope of the line x = qty of the independent variable x axis = independent variable y axis = dependent variable ```

Question 44

Forecasting techniques: Regression analysis: Cost equation?

Answer 44

y = A + Bx ``` y = total costs (dependent variable) A = fixed costs (the y-intercept) B = variable cost per unit (slope of the line) x = number of units (independent variable) ``` Or Total costs = fixed costs + (variable cost per unit x # of units)

Question 45

Forecasting techniques: Regression analysis: what does coefficient of determination measure?

Answer 45

Goodness of fit.