Topic 3 - Budgeting and Forecasting Flashcards

Question

What is a functional/departmental budget?

Answer 1

Functional/departmental budgets include budgets for sales, production, purchases, labour and administration.

Answer 2

A technique used to assess the impact of changes in assumptions on budgeted outcomes. A sensitivity analysis (sometimes called a 'what if?' analysis) might be performed to show the effect of changes such as these.

Answer 3

The high-low method is a technique for analysing the fixed and variable cost elements of a semi-variable cost and thus predicting the cost to be incurred at any activity level within the relevant range.

Answer 4

1. Pick high/low activity levels - The difference between the total costs of these two periods will be the total variable cost of the difference in activity levels. 2. Calculate variable cost per unit 3. Calculate fixed costs 4. Use y = a + bx to predict the cost for a given activity level.

Answer 5

y = a + bx * y is the dependent variable * a is a constant * b is a constant * x is the independent variable

Answer 6

This can be adapted to express a relationship between costs in the form TC = FC + (VC/unit √ó output) where: * TC is the dependent variable * FC is a constant * VC/unit is a constant * Output is the independent variable

Answer 7

B: High-low method

Answer 8

A major disadvantage of the high-low method is that it takes account of only two sets of data, which may not be representative of all the data available.

Answer 9

Linear regression analysis is a statistical technique for establishing a straight line equation to represent a set of data.

Answer 10

Linear Regression Analysis.

Answer 11

It takes into account all sets of recorded data, providing a more accurate estimate.

Answer 12

A further issue with the use of both the high-low method and linear regression analysis is that the quality or reliability of the linear equation derived will depend upon the correlation between the variables.

Answer 13

Correlation is the degree to which one variable is related to another, ie the degree of interdependence between the variables.

Answer 14

Positive correlation: As one variable increases, so does the other. Negative correlation: As one variable increases, the other decreases.

Answer 15

"The coefficient of correlation, r The degree of correlation between two variables can be measured using the coefficient of correlation, r. r has a value between ‚Äì1 (perfect negative correlation) and +1 (perfect positive correlation). If r = 0 then the variables are uncorrelated."

Answer 16

The variables are uncorrelated.

Answer 17

The coefficient of determination, r2, is a measure of the proportion of the change in one variable that can be explained by variations in the value of the other variable. Between 0 and 1

Answer 18

The coefficient of correlation, r, between vehicle maintenance costs and vehicle running hours has been calculated to be 0.96. What does this degree of correlation indicate? r = +0.96 r2 = +0.9216 92.16% of the change in y (cost) can be explained by the change in x (output). 7.84% can be explained by other factors.

Answer 19

Time series: A time series is a series of observations recorded over time. Any pattern found in the data is assumed to continue into the future and a forecast is produced. There are four components of a time series: trend, seasonal variations, cyclical variations and random variations.

Answer 20

1. Trend 2. Seasonal variations 3. Cyclical variations 4. Random variations.

Answer 21

Trend: The trend is the long-term underlying movement in the data.

Answer 22

Seasonal variation: Seasonal variations are short-term patterns that occur during different periods such as rush hour during the day, weekdays during the week, or warmer months of the year.

Answer 23

Cyclical variations: Cyclical variations are medium to long-term patterns such as economic booms and recessions. In practice they are difficult to predict and model.

Answer 24

Random variations: Random variations are the product of randomness and so cannot be predicted.

Answer 25

A moving average removes seasonal variations to forecast long-term trends. A moving average is an average of the data of a fixed number of periods. The aim of calculating moving averages is to remove the effect of seasonal variations, for use in forecasting long-term trends.

Answer 26

Seasonal variations can be estimated using: * The additive model TS = T + SV or * The multiplicative model TS = T √ó SV Where TS = actual time series, T = trend, SV = seasonal variation. If the trend is increasing or decreasing over time, the multiplicative model produces more accurate forecasts than the additive model. This is because, if the trend is increasing or decreasing, seasonal variations are likely to be increasing or decreasing too. The additive model simply adds an unchanging figure to the trend figures.

Answer 27

If the trend is increasing or decreasing over time, the multiplicative model produces more accurate forecasts than the additive model. This is because, if the trend is increasing or decreasing, seasonal variations are likely to be increasing or decreasing too. The additive model simply adds an unchanging figure to the trend figures.

Answer 28

1. Past trends will continue in the future 2. A linear trend relationship exists 3. Seasonal variations are constant or proportional to the trend line.

Answer 29

Cyclical variations are difficult to predict and random variations are impossible to predict. They are therefore excluded from the models

Answer 30

Data outliers are observations that are abnormal and can therefore significantly distort the results. Sometimes outliers are removed from the data set before applying forecasting techniques.

Answer 31

High volume, high velocity, high variety of data used for identifying trends.

Answer 32

Big Data management relates to the storage and administration of large volumes of data in all forms.

Answer 33

Big Data analytics are used to analyse the data to identify relationships, patterns and other correlations in order to improve profitability.

Answer 34

Data mining is the process of sorting through data to identify patterns and relationships between different items.

Answer 35

Sources of Big Data include website traffic, online trends, customer feedback, promotions, responses to emails and online promotions and adverts, microeconomic factors specific to the business's industry.

Answer 36

1. Forecasting demand 2. Identifying customer preferences.

Answer 37

1. Privacy concerns 2. Security issues 3. Incorrect data 4. Lack of forecasting tools and skilled analysts.

Answer 38

Artificial intelligence (AI) is the use of computers to do tasks which are thought to require human intelligence eg learning, knowing, sensing, reasoning, creating things and generating and understanding language.

Answer 39

Machine learning is a field within AI where computers learn to do things rather than follow pre-programmed rules. Predictions improve as more data is analysed and the forecasting formula is refined.

Answer 40

1 This helps you to demonstrate professional scepticism 3 • There may be bias inherent in the data that is analysed. This may be intentional or unintentional. • The data may have been intentionally manipulated during the analysis process. • The data may have been analysed accurately, but the presentation of the data, or the conclusions drawn from it may be flawed or may have been designed to mislead the users.

Answer 41

A variable is excluded from the data model and therefore the cause of a change in one variable is incorrectly attributed to another variable in the model eg a change in sales volume

Answer 42

This relates to human perception and includes bias depending on how data is presented (eg infographics or the order of presentation, known as the 'framing effect') and 'anchoring' (eg being influenced by the first piece of information offered or 'stuck' on last year's numbers) eg budgeting

Answer 43

This occurs when people see data that confirms their beliefs and they ignore (consciously or sub-consciously) data that disagrees with their beliefs eg new product/market research

Answer 44

This is the tendency towards studying successful outcomes while excluding unsuccessful outcomes eg if only repeat customers are asked to participate in a survey

Answer 45

Data presented graphically also requires professional scepticism. Bias can appear in charts and infographics, either deliberately or through misunderstanding. Bias can occur by: • Manipulating axes on a graph or bar chart. • Omitting some data.

Answer 46

Imposed or top-down budgeting is where top management prepare a budget with little or no input from operating personnel, which is then imposed upon the employees who have to work to the budgeted figures.

Answer 47

The situations when imposed budgets are effective: • In newly-formed organisations • In very small businesses • During periods of economic hardship • When operational managers lack budgeting skills

Answer 48

1. Enhances coordination and strategic objectives 2. Uses senior management experience effectively 3. Reduces time spent on budgeting.

Answer 49

1. Can lead to dissatisfaction and low morale 2. Budgets may be unrealistic or unachievable 3. Limits acceptance of organizational goals.

Answer 50

Participative or bottom-up budgeting is where budgets are developed by lower-level managers who then submit the budgets to their superiors. The budgets are based on the lower-level managers' perceptions of what is achievable and the associated resources.

Answer 51

1. Increased commitment to objectives 2. Based on up-to-date information 3. Improves morale and motivation.

Answer 52

1. Time-consuming negotiations required 2. Managers may introduce budget slack (overstating costs or understating revenues) 3. Senior management changes may cause dissatisfaction.

Answer 53

Top-down: Budgets are prepared by senior management with little input from employees. Bottom-up: Lower-level managers develop budgets and submit them to their superiors.

Answer 54

The practice of overestimating expenses and or underestimating the project revenues when prepping a budget statement for the rest of the financial period. Makes budget more flexible by eliminating slack, the company can make more precise financial predictions and aspire better organisational decisions. Might be due to Uncertainty Information asymmetry (person preparing budget doesn’t know enough about specific team) Managers get rewards so they set it lower

Answer 55

A traditional approach where the forthcoming year's budget is based on the current year’s results modified for changes in activity levels and prices. Incremental budgeting is a reasonable approach if the current operations are as effective, efficient and economic as they can be.

Answer 56

1. Easy to prepare.

Answer 57

1. Inefficient 2. Budgetary slack is protected and carried forward.

Answer 58

A budgeting approach where each budget should be prepared from zero, and every item of expenditure must be justified separately to be included in the budget.

Answer 59

1. Obsolete or inefficient operations can be identified and removed. 2. Results in a more efficient allocation of resources. 3. Particularly useful for discretionary costs like marketing and training.

Answer 60

1. Time-consuming 2. Expensive 3. May emphasize short-term benefits over long-term goals.

Answer 61

A budget that extends by an extra period as the current period ends, instead of preparing an annual budget. They are particularly useful when an organisation is facing a period of uncertainty so that it is difficult to prepare accurate plans and budgets. Instead of preparing a periodic budget annually for the full budget period, budgets would be prepared, say, every one, two or three months (four, six, or even twelve budgets each year). Each of these budgets would plan for the next twelve months so that the current budget is extended by an extra period as the current period ends – hence the name rolling budgets.

Answer 62

They are particularly useful when an organisation is facing a period of uncertainty so that it is difficult to prepare accurate plans and budgets.

Answer 63

Instead of preparing a periodic budget annually for the full budget period, budgets would be prepared, say, every one, two or three months (four, six, or even twelve budgets each year). Each of these budgets would plan for the next twelve months so that the current budget is extended by an extra period as the current period ends – hence the name rolling budgets.

Answer 64

1. The budget is more realistic and certain. 2. Planning and control are based on a more recent plan. 3. Managers are forced to reassess the budget regularly.

Answer 65

1. Involves more time, effort, and money in budget preparation. 2. May demotivate managers if they cannot see the benefit of regular revisions.

Answer 66

A budgeting approach that suggests budgets should be more adaptive and agile, rather than rigid and fixed.

Answer 67

1. Purpose – Engage and inspire people around bold and noble causes. 2. Values – Govern through shared values and sound judgment. 3. Transparency – Make information open for self-regulation, innovation, and learning. 4. Organisation – Cultivate a strong sense of belonging in accountable teams. 5. Autonomy – Trust people with freedom to act. 6. Customers – Connect everyone’s work with customer needs.

Answer 68

1. Rhythm – Organize management processes dynamically. 2. Targets – Set directional, ambitious, and relative goals. 3. Plans and forecasts – Use unbiased, flexible planning. 4. Resource allocation – Foster a cost-conscious mindset. 5. Performance evaluation – Evaluate holistically with feedback for learning. 6. Rewards – Reward shared success rather than fixed performance contracts.

Topic 3 - Budgeting and Forecasting Flashcards

(92 cards)