CMA P1 Gleim Unit 8-9知识点整理

PART THREE: Planning, Budgeting, and Forecasting 30%

Unit 8. Analysis and Forecasting Techniques

Forecasting methods:

1) Qualitative methods: rely on manager's experience and intuition

2) Quantitative methods: use mathematical models and graphs

* Correlation Analysis: analysis the strength of linear relationship b/w two variables

=> the foundation of any quantitative methods of forecasting

=> expressed in terms of the coefficient of correlation(r)

=> r ∈[ -1,1 ]

r = -1 : perfect inverse relationship

r = 1 : perfect direct relationship

-1 < r < 1 : strong/weak direct relationship

r = 0 : no linear relationship

=> the coefficient of determination (r2) is a measure of how good the fit is

r2of the variation of Y can be explained by the changes of X

* Regression Analysis (least-square analysis): the processing of deriving the linear equation that describes the relationship b/w two variables with r ≠0

=> almost a necessity for computing fixed and variable portion of mix costs for flexible budgeting => regression does not determine causality!

1) Simple regression: used when only one independent variable x

=> equation: y = a + bx where y = dependent variable

x = independent variable

a = y intercept (fixed portion)

b = slope of the regression line (variable portion)

2) Multiple regression: used when more than one independent variables, allows to identify many factors and to weight each based on influence over final outcome

=> equation: y = a + b1x1 + b2x2 + b3x3 + etc.

Assumptions of linear regression model:

1) the linear relationship is only valid across the relevant range

=>do not projecting relationship beyond it

=> a negative a in simple regression usually indicate it's outside the range

2) past relationships can be validly projected into future

3)homoscedasticity(constant variance): the distribution of y around the regression line is constant for different value of x

* Learning Curve Analysis: reflects the increased rate at which people perform tasks as they gain experience

=> the curve is usually expressed as a % of reduced time to complete a task for each doubling of cumulative production

=> the most common % used is 80%

eg.

Application Methods:

1)★Cumulative average-time learning model: projects the reduction in cumulative average-time used to complete tasks

=> most used by CMA questions

2)Incremental unit-time learning model: projects the reduction in incremental time used to complete the last task

Limitation of learning curve: hard to know the shape of the curve, many companies simply use 80%

* Time Series Analysis: projects future trends based on past experience

taken to calculate next period's forecast

—using a more data-intensive method (moving average) Step 2 —Set the smoothing factor (α) b/w 0 and 1 => closer to 1, more rely on recent data Step 3 —Calculate the next period's forecast

The general formula: F t = αx t-1 + (1-α) F t-1where: F= the forecast for a period

t = the time period

α=the smoothing factor

x = the actual result for a period

* Expected Value (EV): a means of associating a $ amount with each of the possible outcomes of a possibility distribution

=> the outcome with highest EV is the optimal alternative

=>EV = probability1×payoff1 + probability2×payoff2 + etc.

=> benefit of EV method: to evaluate in a more organized manner, to think all the possibilities =>limitation: based on repetitive trials, not suitable for one trail

Expected value of perfect information(EVPI): the additional EV that could be obtained if a decision maker knew ahead of time which state of nature would occur

=>EVPI = EV with perfect info. - EV without perfect info.

=> be willing to pay for perfect info. no more than EVPI

*Sensitivity Analysis: reveals how sensitive EV calculations are to the accuracy of the initial estimates => useful in determine whether expending additional resource to obtain better forecasts => benefit: can see the effect of changed assumptions on the final objectives by testing different combinations of probabilities

=> weakness: a trail-and error method inherent (greatly reduced by using computer software)

=> a major use of sensitivity analysis is in capital budgeting where a small change in interest can lead to great difference in the possibility of project

* Strategic Management: sets overall objectives and guide the process of reaching those objectives => it’s upper management responsibility

=> closely linked with strategic planning, both have a long-term horizon

Five-stage process:

1)Mission and goals

=> mission statement summ arizes the entity’s reason for existing

2) SWOT analysis

=> SW for internal environment, OT for external

3) Form strategy

=> describe how the mission will be achieved

4) Implementation

=> involves every employee at every level

5) Strategic controls and feedback

=> determine the degree of progress towards the stated objectives

P orter’s Five Competitive Forces:

=>five competitive forces that determine long-term profitability as measured by long-term return on investment

=> evaluation of basic economic and technical characteristics that determine the strength of each force and the attractiveness of the industry

1) Intensity of competitive rivalry:

=> intense when an industry contains many strong competitors

=> intensity varies with many factors

a) the stage of the industry life cycle (more intense in decline period than growth)

b) the distinctions among products

c) whether fixed costs are high in relation to variable one (more intense if higher fixed cost)

d) capacity expansion (more intense if larger size of expansion is needed to achieve

economies of scale)

2)Threat of new entry:

=>profitable industry with high returns will attract new firms

=> threat is high if entry barriers are low

=> the most favorable industry condition is high entry barriers and low exit barriers

a) threat is minimized

b) returns are high

c) risk is reduced in the event of poor performance

3)Threat of substitute:

=> limits price increases and profit margin, the greater the threat, the less attractive to potential entrants

=> factors affecting the threat

a) relative prices

b) cost of switching to a substitute

c) customer’s inclination to use a substitute

4)The bargaining power of buyers:

=> the ability of the buyer to put firms under pressure to obtain better terms

=> the buyer power is high if they have many alternatives and the cost of switching is low

5)The bargaining power of suppliers:

=> suppliers of inputs to the firm can be a source of power when there are few substitutes Generic Competitive Analysis Model:

Strategies with a board competitive scope:

1)Cost leadership: seek competitive advantage through lower cost

2)Product differentiation: providing unique products

Strategies with a narrow competitive scope:

1)Focused cost

2)Focused differentiation

Five Operations Strategies:

1) Cost strategy: successful when the entity is a low-cost producer

2) Quality strategy: involves competition based on product quality

3) Delivery strategy: consistently delivered rapidly and on time

4) Flexibility strategy: involves offering many different products

5) Service strategy: maximize customer value by providing service

The Growth-Share Matrix:

MGR: reflects the maturity and attractiveness of the mkt and the relative need for cash to finance expansion

RMS: reflects the SBU's competitive position in the mkt segment

= SBU's absolute mkt share divided by that of its leading competitor

Question Mark: are weak competitors and poor cash generator in high growth market

=> need large amount of cash to compete in the market and increase RMS

=> if RMS increases significantly, may become a star; if not, may become dog

bulid strategy for question marks that are potential to be star, divest strategy for question marks that reduce profitability

Star: are strong competitors in high growth market

=> profitable but need large amount of cash to expansion

=> net cash flow is modest

Cash Cow: are strong competitors and strong cash generator

=> high profit margins and economics of scale

=> do not need to expand so excess cash can be used for investment

hold strategy for strong cash cow, harvest strategy for weak cash cow

Dog: are weak competitors in low growth market

=> net cash flow is modest

divest strategy for dogs that reduce profitability

* Balanced Scorecard: an accounting report that connect a entity's critical success factors to measurements of its performance

Critical success factors (CSF): specific, measurable financial and nonfinancial elements of a firm's performance that are vital to its competitive advantages

1) Financial

2) Customer satisfaction

3) Internal business process

4) Learning and growth

:

=> the determination of what is to be done and how, when, where, and by whom it is to be done => forecasting is the basis of planning because it projects the future

=> establishes the means to reach organizational objectives

planning includes strategic budgeting. An entity must complete its strategic plan before any strategic budgeting begin.

=> strategic planning embodies the concerns of senior managements

=> eg. capital budgeting should be premised on forecasts about economic cycle, price movement Means-End Hierarchy: objectives should be established at the top and retranslated in more specific items when communicated downward

After objectives and premises are formulated , next step is to determine:

1) Policies: general statements that guide thinking and action in decision making

2) Procedures: specific directives that define how work is to be done

3) Rules: specific, detailed guides that restrict behavior

Management by Objective (MBO):

=> a behavioral, communicated-oriented, responsibility approach to management and employee self-direction

=> based on the philosophy that employees

1)want to work hard if they know what is expected

2) like to understand what their jobs actually entail

3) be capable of self-direction and self-motivation

=> MBO requires

1) senior management participation and commitment to the program

2) integration of objectives for all subunits

3) Provisions for regular reporting of performance towards objectives

4) free and honest communication

5) good organizational commitment

Unit 9. Budgeting

* Budget as a tool:

1) Planning tool:

=> a budget is a written plan for the future

=> companies that prepare budgets anticipate problems before they occur

=> a firm with a goal in the form of a budget will be able to plan

=> force management to evaluate the reasonableness of assumptions used and goal identified in the budgetary process

2) Control tool:

=> provides a formal benchmark to be used for feedback and performance evaluation

3) Motivational tool:

=> helps motivate employees to do a good job

4) Communication tool:

=> helps tell employees what goals the firm is attempting to accomplish

=> coordinates activities b/w management and subordinates

* Major Objectives of Budget System:

1) Foster the planning of operations

2) Provide a frame work for performance evaluation

3) Promote communication

4) Coordinate among org. segments

* Characteristics of a Successful Budgeting Process

1) Sufficient lead time: a budget must be finalized when the fiscal year begins

=> budget planning calendar is the schedule of activities for the development and adoption of the budget

2) Budget manual: describes how a budget is to be prepared

=> everyone involved in preparing the budget at all levels must be educated on the detailed procedures for preparing and submitting their part of the overall budget

=> usually include a planning calendar, distribution instructions for all budget schedules

3) Buy-in at all levels:

=> the support of top management is crucial to the budget process

* Participation in the budget process:

1) Board of directors: formulate the mission statement which the budget process begins with

2) Senior management: translate the mission statement to a strategic plan with measurable goals

3) Budget department:

draft the budget calendar and budget manual

review and approve departmental budgets

=> Primary role: compile the budget and manage the budget process

4) Middle and lower management: receive budget instructions and budget with the guideline

* Top-down budget:

=> imposed by upper management and thus has less chance of acceptance

=> impose on subordinates without their participation

=> major disadvantage is the impairment of goal congruence

Bottom-up budget:

=> general guidance form upper management, followed by extensive input from middle and lower management

=> a great level of acceptance

* Time frame for budget:

1) Strategic plans and budget: ~ 10 years or more most concern senior manager

2) Intermediate plans and budget: ~ 2 years most concern middle manager

3) Operational plans and budget: 1 month ~ 1 year most concern lower-level manager

* External factor effects on budget:

1) General economic conditions: budget depends on the expected trends and availability of financial resources

2)Industry situation: current mkt share, governmental regulations, labor mkt, activities of competitors

* Controllability: the extent to which mangers can influence activities and related revenues & costs => a key concept in the use of budgets to evaluate performance

Controllable costs: those costs that are under the discretion of a particular manager

* Master budget (annual profit plan): a complication of all separate operating and financial budget schedules of an org.

=> operating budget emphases on obtaining and using current resources

=> financial budget emphases on obtaining the fund to purchase operating assets

* Capital Budgeting: the process of planning expenditures on long-lived assets, involving choose among investment proposals using a ranking procedure.

=> have a multi-year perspective

=> direct impact on cash budget and pro forma F/S

* Activity-based Budgeting: applies ABC to budgeting, involving defining the activities that drive indirect costs

=> its greatest impact is on the application of indirect costs

=> the key is to select a driver that has a direct cause-and effect relationship with the level of activity

*Zero-based Budgeting (ZBB): a budget and planning process in which each manager must justify the department's entire budget every budget cycle

Objective: to encourage reexamination of all costs in the hope that some can be reduced or eliminated

Disadvantage: requires more time and effort to prepare than traditional budgeting process

* Continuous (rolling) Budgeting: revised on a continuous basis

* Incremental Budgeting: a traditional budgeting process that current year's budget is simply adjusted to allow changes planned for the coming year

* Budgetary Slack: the practice of understating budgeted revenues or overstating budgeted costs to make budgeted targets more achievable

Definition:

1. The excess of resources budgeted over the resources necessary to achieve the org's goals

=> taken to avoid unfavorable variance from expectations

2. The intentional allowance for extra expenditures in a future cash flow.

=> can take one of two forms:

a) underestimate the revenue that will come in over a given amount of time, or

b) overestimate the expenses that are to be paid out over the same time period

Advantages:

1. provides flexibility for operating under unknown circumstances

2. additional slack may be used to cover some costly items

3. avoid unfavorable variance to ensure management performance

Disadvantages:

1. decreases the ability to highlight weaknesses and take actions to improve

2. discourage management from implement new programs

3. less motivational to subordinates