Projection and Forecasting Techniques

Question 1

What is a sensitivity analysis?

Answer 1

• the process of experimenting with different parameters and assumptions regarding a model and cataloging the range of results to view the possible consequences of a decision
• often use probabilities to approximate reality
• used in the budgeting process to determine which variables are the most sensitve to change and therefore will have the biggest effect on the bottom line
• biggest drawback: assumption that variables are independent

Question 2

What is the high-low method?

Answer 2

• used to estimate the fixed and variable portions of cost, usually production costs
• high and low dollar total costs/high and low volumes = variable cost per unit
• high volume * variable cost per unit = variable costs
• total costs - variable costs = fixed costs

Question 3

What is a flexible budget?

Answer 3

• a series of budgets that are prepared for a range of activity levels rather than a single activity (variable costs adjusted to the level of activity and fixed costs are held constant)
• total cost = fixed cost + (variable cost per unit * # of units)

Question 4

What is a learning curve analysis?

Answer 4

• based on the premise that as workers become more familiar with a specific task, the per unit labor hours will decline as experience is gained and production becomes more efficient
• used to set standards and to project costsm, as variable costs per unit should decline until a steady state period is achieved. Labor hours per unit will remain constant once steady state occurs
• in order for learning curve analysis to be applied, the activity itself must be repetitive in anture, involve intense labor and have little to no labor force turnover or breaks in production
• the calc begins with the first unit/batch. as production doubles, cumulative average time per unit falls to a fixed eprcentage of the previous average time

Question 5

What is the cost volume profit (CVP) analysis?

Answer 5

• used by managers to forecast profits at different levels of sales and production volume
• synonymous with breakeven analysis
• the model assumes that the product mix remains constant
• contribution approach is used for breakeven analysis

Question 6

What is the absorption approach?

Answer 6

• does not segregate fixed and variable costs

Revenue - COGS= GM -
variable and fixed SG&A expenses (opex)= NI

Question 7

What is the contribution approach?

Answer 7

• uses variable/direct costing

Revenue - variable costs= contribution margin - fixed costs= NI

Question 8

What are variable costs?

Answer 8

• direct labor, direct materials, variable manufacturing OH, shipping and packaging and variable selling expenses

Question 9

What are fixed costs?

Answer 9

• fixed OH, fixed selling and most general and admin expenses

Question 10

What is the formula for unit contribution margin?

Answer 10

unit sales price - unit variable cost

Question 11

What is the contribution margin ratio formula?

Answer 11

CM ratio= CM/revenue

Question 12

How do you calculate the difference between variable costing NI and absorption costing NI?

Answer 12

1. compute the fixed cost per unit (fixed MOH/units produced)
2. compute the change in income (change in inv units * FC per unit)
3. determine impact of change in income:

no change in inventory: absorption NI = variable NI
increase in inventory: absorption NI > variable NI
decrease in inventory: absorption NI < variable NI