Chapter 6 - Planning Control Analysis and Risk Management

Question 1

Types of Budgets

Answer 1

• Master budget - a static hduget for the company as a whole/ This would summarize various individual budgets (Esp operating and financial budgets)
• operating budget - Projected/future/budgeted income statement
• financial budget - Projected/future/budgeted capital or cash budget, balance sheet, or Stmnt of CF. Usually for 1 year, but could be a rolling budget as well
• static budget - analyze specific conditions. Unchanged budgets unless recalculated
• Kaizen budgeting
• Flexible budget -

Question 2

purchase budget

Answer 2

Question 3

What would a production budget look like

Answer 3

Budgeted or Projected Sales
+ Desired ending inventory of finished goods
Total Needs

- Beginning Inventory of finished goods

of units to be prodcued

Question 4

Flexible budget example:

the picture here is the budget. Sales were acutally 1500, so higher by 50%. To modify:

Answer 4

see picture attached to explain. Thus, the following formula we learned earlier will also work with this to find total cost.

Y = A + (b * X)

A is Fixed costs, b is variable costs, and X is the cost driver.

Question 5

Given the picture, show the original formula we must have used for this flexible budget.

Answer 5

Well notice how that when sales were $1000, the variable costs were $600. Thus, there must be a variable cost of 60% of sales. So:

Y = A + (b * x)

Y = 300 FC + VC(0.6 * X)

Y equals total costs, A is fixed costs, the parentheses at the end represent the total variable costs.

Question 6

What are total budget formula is Y = 300 FC + VC(0.6 * X)

If Sales were $1000, what were total costs (Y)?

Next - to illustrate how east it is to change flexible budgets - what if sales were actually 1500?

Answer 6

Put the sales figure into X

Y = 300 + (.6*1000) = 300 + 600 = 900

Next formula:

Y = 300 + (.6*1500) = 300 + 900 = 1200

Question 7

Purpose of correlation analyiss

Answer 7

Remember that linear formula:

Y = FC + VC (b * X)

Sometimes companies try to identify which predictors would be the best to use as the X.

For instance - perhaps sales is the best indicator for total costs or direct labor hours would be best for manufacturing overhead. Whatever the case, to find the best relationship between two variables, correlation analysis is used

Question 8

correlation analysis results

Answer 8

Question 9

Purpose of responsibility accounting

Answer 9

To identify which parties within an organization are responsible for what and to seek standards to measure performance on them.

There are three sectors, and each lateer sector incldues responsibilites of the prior sector

1. Cost Center - deals mainly with costs incurred by the center - tings like pruchasing, etc

• *2. Profit Center -** This would be the sales people, etc. respojnsible for revenue earned in the company but they are ALSO RESPONSIBLE for the cost center’s duties
  3. Investment Center - does capital investments, and ALSO has responsibilies of the cost and profit center

Question 10

Activity Based Costing

Answer 10

Try to group together costs affected by common factors and place them into a single cost driver.

Eg - Depreciation, maintencance, and repairs can be put together as a group and affected by machine hours.
or

Payroll taxes, wages, and benefits are grouped and affected by direct labor hours

Question 11

Value-added vs non-value added

Answer 11

Value-adding costs:

• engineering costs
• Reseach and development
• modifying to customer’s specifications
• expenses that improve performance
• direct manufacturing costs
• operation of production machinery

Non-Value-adding costs:

• STORAGE OF RAW MATERIALS***
• moving
• handling
• factory utilities
• depreciation

Storage is often tested for some reason

Question 12

Systematic vs Unsystematic Risk

Answer 12

unsystematic is risk that is unique, ie, pertains to a specific investment. It can possible be avoided through things like diversification, etc.

systematic risk is risk pertaining to market conditions. Tends to be unavoidable

Question 13

Project management

Answer 13

1. Project Initiation
2. Project Planning
3. Project Execution
4. Minitoring
5. Project Closure

Question 14

Put vs Call contracts

Answer 14

Put - to SELL at an agreed price

Call - to BUY at an agreed price.

So say we expect to pay a British supplier in three moenths, the best hedge for us to enter is a British Pound Call Option. We’d BUY the option (incorrect answe’rs may say “sell the option”)

Question 15

theory of constraints

Answer 15

identifying bottlenecks

Question 16

DuPont ROI Analysis

Answer 16

ROI = Return on Sales X Asset Turnover

return on sales = net income/sales

asset turnover = sales/total assets

Question 17

Residual Income

Answer 17

Operating Profit - Interest on Investment

***Interest = asset/investment balance x required rate of return. So say a company has profit of 400, a ROR of 10%, and 100 total assets.

Residual Income is

400 profit - 10 = 390

Question 18

4 balanced scorecard measures

Answer 18

1. Financial Perspectives -
2. Customer Perspectives
3. Internal business process cycles - measures internal variances/averages, finding defects, etc. A key component of innovation iwthin organizations
4. Learning and growth perspectives - ensure that key drivers of organization’s long-term abilities to carry out mission of organization are not neglected for short-term obejctives. Include things like:
   tracking employee satisfaction, and maintianing employee training and advancement

Question 19

Budgets must be prepared in the following order

Answer 19

1. Sales Budget
2. Production Budget
3. Direct/raw Materials purchases
4. Cash Disbursements Budget
5. Budgeted FIN. Statements: I/S, CF, B/S

Question 20

what measures volatility of an investment?

Answer 20

Standard Deviation (GERT would be an incorrect answer. That refers to a project management technique)

Question 21

Multiple regression vs simple regression

Answer 21

multiple allows more INdependent variables

Question 22

Benchmarking

Answer 22

continuous process of comparing a company’s financial data to published ifnormation to see if optimal performance is being achieved

Question 23

In using regression analysis, which measure indicates the extent to which a change in the independent variable explains a change in the dependent variable?

Answer 23

R squared