For Essay Questions

based on LOS 2015

Section B. Planning, Budget and forecasting

)30 % Level A, B and C)
2015

Prepared By: Arab web soft | Emad Hamdy

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 Budget Cycle LOS 2015 | Section B.2 Budgeting Concept

The budgeting cycle includes the following elements:

a. Planning the performance of the company as a whole as well as planning the performance of
its Subunits. Management agrees on what is expected.
b. Providing a frame of reference, a set of specific expectations against which actual results can
be compared.
c. Investigating variations from plans. If necessary, corrective action follows investigation.
d. Planning again, in light of feedback and changed conditions

 Advantages of Budget ( PCCMA )

1- As planning tool budget forces the organization to examine the future.
Without a budget, the organization would be operating in a reactive manner, rather than in a
Proactive manner.
2- Budgets promote coordination and communication among organization units and
activities
budgets requires departmental managers to make plans in conjunction with the plans of other
interdependent departments, If the firm does not have an overall budget, each department tends
to pursue its own objectives without regard to what is good for the firm as a whole..
3- As a control tool
1) A budget helps a firm control costs by setting cost guidelines.
2) Guidelines reveal the efficient or inefficient use of company resources.
3) A manager is less apt to spend money for things that are not needed if (s) he knows that all
costs will be compared with the budget.
4) Budgets can also reveal the progress of highly effective managers.
5) Managers can also use a budget as a personal self-evaluation tool.
6) Budgetary slack (overestimation of expenses), however, must be avoided if a Budget is to
have its desired effects
7) For the budgetary process to serve effectively as a control function, it must be integrated with
the accounting system and the organizational structure

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 4- Provide motivation for managers and employees to achieve the company's plans
1) A budget helps motivate employees and managers to do a good job.
a) Employees are particularly motivated if they help prepare the budget.
b) A manager who is asked to prepare a budget for his/her department will work hard to stay
within the budget.
2) A budget must be seen as realistic by employees before it can become a good motivational
tool.
3) the budget is not always viewed in a positive manner. Some managers view a budget as a
restriction.
4) Employees are more apt to have a positive feeling toward a budget if some degree of
flexibility is allowed
5- Promotes the efficient allocation of organizational resources
A budget helps management to allocate resources efficiently and to ensure that subunit Goals
are congruent with those of other subunits and of the organization.

 Types of Plans
Strategic Plans (Long-Term Plans)
Strategic plans; are broad, general, long-term plans (usually five years or longer) and are based
on The objectives of the organization. Strategic planning is done by the company's top
management.
This type of planning is neither detailed nor focused on specific financial targets, but instead
looks at The strategies, objectives and goals of the company by examining both the Internal and
external factors affecting the company.
Intermediate and Short-Term Plans
The strategic plan is then broken down into Intermediate or tactical plans (one to five years),
which are designed to implement specific parts of the strategic plan. Tactical plans are made by
upper and Middle managers.
Short-term or operational plans are the primary basis of budgets. Operational plans refine the
overall objectives from the strategic and tactical plans in order to develop the programs, policies
and performance expectations required to achieve the company's long-term strategic goals .

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 Characteristics of Successful Budgeting
1) The budget must be aligned with the corporate strategy.
2) The budget must have the support of management at all levels.
3) People who are charged with carrying out the budget need to feel ownership of the budget.
4) The time period for a budget should reflect the purpose of the budget
5) The budget should be a motivating device.
6) A budget should be flexible.
7) To be useful, the budget should be an accurate representation of what is expected to Occur.
8) A budget should be coordinated.
9) Budgeting should not be rigid.

 Time Frames for Budgets

Annual Budget: The budget generally prepared for a set period of time, commonly one year,
and the annual budget subdivided into months or quarters.
Rolling or Continuous Budget: Budgets can also be prepared in continuous basis. The budget
covers a set number of months, quarters or years into the future. Each month or quarter just
completed is dropped and a new month or quarter's budget is added to the end of the budget. At
the same time the other periods can be revised to reflect any new information available. Thus,
the budget is being updated continuously and always covers the same amount of time in the
future.

 Who Should Participate in the Budgeting?

Budget Participants
the board of directors,
top management, and
the budget committee.
Middle and lower management also play a significant role, because they create detailed
Budgets based on upper management's plan

 Board of Directors
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The budget process begins with the mission statement formulated by the board of directors.
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The board of directors does not create the budget, but the BOD responsible for reviewing the
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budget and either approves it or send it back for revision. The board usually appoints the
members of the budget Committee.

 Top Management
Senior management translates the mission statement into a strategic plan with measurable,
Realizable goals .
Importance of top management involvement
The budget review and approval process ensures top management that budget guidelines are
Being followed.
is an Effective way to discourage lower-level managers from playing budget games.
motivates lower managers to believe in the Budget, because they know that the boss cares
about the budget.
An organizational budget requires a significant commitment of internal resources.

 Budget Committee (The highest authority in an organization for all matters related to the budget.)
Large corporations usually need to form a budget committee composed of senior management,
and often led by the chief executive officer (CEO) or a vice president. The committee directs
budget Preparation, approves the departmental budgets submitted by operating manager's
budgets, rules on Disagreements, monitors the budget, reviews results, and approves revisions,
draft the budget Calendar and budget manual.

 Middle and Lower Management

Once the budget committee sets the tone for the budget process, many others in the
organization have some role to play. Middle and lower management do much of the specific
budgeting work.
Middle and lower management receive their budget instructions, draw up their departmental
budgets in conformity with the guidelines, and submit them to the budget committee.
Lower-level managers need to be involved , and this is the bottom up part.

 Budget Department or Controller

The budget department is responsible for compiling the budget and managing the budget
process.The budget director and department are not responsible for actually developing the
estimates on which the budget is based .
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 Authoritative or Participative Budgeting
The Authoritative approach ( Top – Down Budget , Imposed Budget ) :
Advantages:
provides better decision-making control.
increases coordination among operating units.
reduces the time required for budgeting and
facilitates implementation of strategic plans.
Disadvantages:
Often lacks the commitment (“buy-in”) of lower-Level managers and employees responsible for
implementing it.
may result in a budget that is not possible to achieve,
may limit the acceptance of proposed goals and objectives and
reduces the communication between employees and management
The participative approach (Bottom-up budgeting or self-imposed budgets):
Advantages:
A participative budget is a good communication device.
Managers are more motivated to achieve budgeted goals
greater support for the budget and the entity as a whole
greater understanding of what is to be accomplished.
greater accuracy of budget estimates
Disadvantages:
• Higher costs in time and money
• Quality of participation is affected by the objectives, values, beliefs, and expectations of those
involved
• Creation of budgetary slack

 budget development process:

 Budget guidelines are set and communicated.
 Initial budget proposals are prepared by responsibility centers.
 Negotiations, reviewing and approval.
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 Revision.
 Reporting on variances.
 Use of the variance reports.

 Best Practice Guidelines for the Budget Process

The development of the budget should be linked to corporate strategy.
Communication is vital.
Design procedures to allocate funding resources strategically.
Managers should be evaluated on performance measures other than meeting budget
targets.
Link cost management efforts to budgeting.
The strategic use of variance analysis.
Reduce budget complexity and budget cycle time.
Review the budget on a regular basis throughout the year.

 The budget-planning calendar is the schedule of activities for the development

and adoption of the budget.

 Budget manual 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.

 Budgetary Slack and Its Impact on Goal Congruence

Goal congruence it refers to the aligning of goals of the Individual managers with the goals of
the organization as a whole.
Budgetary slack or padding the budget describes the practice of underestimating budgeted
revenues, or overestimating budgeted costs, to make budgeted targets more easily achievable.
On the positive side, budgetary slack can provide managers with a cushion against
Unforeseen circumstances, but Budgetary slack creates more problems than it solves.
The negative results of budgetary slack are that it misrepresents the true profit potential of the
company and can lead to inefficient resource allocation and poor coordination of activities within
the company
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Avoiding problems of budgetary slack
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The best way to avoid the problems of budgetary slack is to use the budget as a planning and
control tool, but not for managerial performance evaluation. Or, if the company does use the
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budget to Evaluate managers, it could reward them based on the accuracy of the forecasts A
firm may decrease slack by emphasizing the consideration of all variables, holding in-depth
reviews During budget development, and allowing for flexibility in making additional budget
changes

 The Concept of Controllability & Responsibility Center

Controllable costs are those that are under the discretion of a particular manager.
No controllable costs are those to which another level of the organization has committed,
removing the manager’s discretion.
A responsibility center is apart, segment, or subunit of an organization whose manager is
accountable for a specified set of activities. Four types of responsibility centers are cost centers,
revenue centers, profit centers, and investment centers. Responsibility accounting is a system
that measures the plans, budgets, actions, and actual results of each responsibility center. (H)

 Policy that allows budget revisions that accommodate the impact of

significant changes in budget assumptions
1) Establishing standards of performance (the budget)
2) Measuring actual performance
3) Analyzing and comparing performance with standards
4) Devising and implementing corrective actions
5) Reviewing and revising the standards

 Cost Standards in Budgeting

Standard costs The use of standard costs in budgeting allows the standard-cost system to Alert
management when the actual costs of production differ significantly from the standard.
Standard costs are costs for direct materials; direct labor and manufacturing overhead that are
predetermined or estimated, as they would apply under specified conditions

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 Four reasons for using standard costs are:
(i) cost management,
(ii) Pricing decisions,
(iii) Budgetary planning and control, and
(iv) Financial statement preparation.

 Advantages of standard cost system

 Assists in performance evaluation.
 Allows employees to better understand what is expected of them.
 Permits development of flexible budgeting.

 Ideal (theoretical) vs. currently attainable (practical) Standard costs

Ideal (theoretical or perfection or maximum efficiency) standards costs
attainable only under the best possible conditions
They are based on the work of the most skilled workers with no allowance for waste, spoilage,
Machine breakdowns or other downtime.
Often called "tight" standards; they can have positive behavioral implications if workers are
Motivated to strive for excellence. However, they are not in wide use because they can have
Negative behavioral effects if the standards are impossible to attain.
 Encourages continuous improvement.
Currently attainable (practical) standards costs
challenging to attain, but attainable under normal conditions and are incorporated into the flexible
budget.
achieved by reasonably well-trained workers with an allowance for normal spoilage, waste, And
downtime.
Serve as a better motivating target for manufacturing personnel.
discourages continuous improvement

 Setting Standard Costs

Standard costs are derived from general standards for operations. Several resources are used in
determining standards for operations. These are;• Activity analysis, • Historical data, and
Activity analysis: Activity analysis is the most accurate way to estimate standard costs. It's a team
development approach performed by people from several different areas, based on investigating all
factors involved in producing a product. The cost of Activity analysis itself can be so high
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Historical data:
Historical data based on using the data of costs involved in similar product in prior periods to determine
standard costs. Standard costs based on past data may make inefficiencies to continue.
LOS 2015 | Section B.4 Budget Methodologies

 Factors affecting the selection of budget methodology:

 Types of business.
 Organizational structure.
 Complexity of operations
 Management philosophy

 MASTER BUDGET / Annual Budget

A) Define
Encompasses the organization’s operating and financial plans for a specified period (Ordinarily a year
or single operating cycle. Is made up of several deferent budgets, and some budgets can't be
developed until other budgets have already been completed.

B) Purpose
to provide comprehensive and coordinated budget guidance for an organization.

C) Appropriate Use
appropriate for most industries but are particularly useful in manufacturing settings that require
coordination of financial and operating budgets.

D) Timeframe
Summarize activity for a one-year period

E) BENEFITS AND LIMITATIONS OF THE MASTER BUDGET

1. Benefits
Master budgets are relatively easy to prepare and are the most commonly developed budget
system.
2. Limitations
Master budget amounts are confined to one year at a single level of activity.

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 PROJECT BUDGET
A) Define
used for creating a budget for specific projects or programs rather than for an entire company, such as
the design of a new airliner or the building of a single ship
B) Appropriate use
Project budgets are appropriate for specific tasks (e.g., construction of building, infrequent
events , or groups of projects such as new product development, marketing, and refinement.
C) Timeframe
The time frame for a project budget is simply the duration of the project, but a multi-year
project could be broken down by year.
BENEFITS AND LIMITATIONS OF THE PROJECT BUDGET
1. Benefits
Project budgets allow for a focused look at a particular project's resource requirements and
timing & the ability to contain all of a project’s costs so that its individual impact can be easily
measured.

2. Limitations
If the budget process improperly done, project budgets may not afford a comprehensive look at
the manner in which the project impacts the organization.

 Activity Based Budgeting

A) Define
Focuses on classifying costs based on activities rather than based on departments or products;
ABB applies activity-based costing principles to budgeting. It focuses on the numerous activities
necessary to produce and market goods and services and requires analysis of cost drivers.
B) Purpose
focuses on costs of activities or cost drivers necessary for operations
C) Appropriate use ABB is most appropriate in businesses that have complexity in their
number of products, number of departments, or other factors such as setups.

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 D) Timeframe
Activity based budgeting is generally applied to annual time periods or less.

 Zero Based Budgeting

A) Define
starts each new budgeting cycle from scratch as though the budgets are prepared for the first
time; ZBB is a budget and planning process in which each manager must justify his/her
department’s entire budget every budget cycle.
B) Purpose
 budgeting process that requires justification of all expenditures every year.
 Many budget systems are referred to as incremental budgets because they assume that
previous budgets represent required levels of effort and need only be adjusted for
additional or incremental expenses. Zero-based budgets are designed to challenge that
assumption and require that manager begin the budget process from zero.
 Thus, managers must conduct in-depth reviews and analyses of all budget items and of
each area under their control to provide such justification.
 Such a budgeting process encourages managers to be aware of activities or functions
that have outlived their usefulness or have been a waste of resources. A tight, efficient
budget often results from zero-base budgeting.
C) BENEFITS AND LIMITATIONS OF ZERO-BASED BUDGETING
1. Benefits
ZBB forces review of all elements of a business.
2. Limitations
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it can require a nearly impossible amount of work to review all of a company's

activities every year. 2 time-consuming 3 expensive annual review process as a result.

 Continuous ( Rolling ) Budgets

A) Define Allows the budget to be continually updated (revised) by removing information for
the period just ended (e.g., March of this year) and adding estimated data for the same
period next year (e.g., March of next year).
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 B) Purpose
Continuous (rolling or perpetual) budgets add a new budget month - rolls forward- (or quarter) as
each current month (or quarter) expires> According to this model, budgeting becomes a
perpetual process and long-range planning is performed continually rather than annually.
C) Appropriate Use
Continuous (rolling) budgets are most effective in dynamic environments where constant re-
evaluation of products and activities are required by the market place or where results of
activities are critical to operations
D) Timeframe
Although a continuous (rolling) budget contemplates a year of activity, it usually does not
Coincide with the organization's fiscal period because it adds either a month or a quarter to the
budget as each month or quarter is completed.
E) BENEFITS AND LIMITATIONS OF CONTINOUS

1. Benefits
- Longer strategic perspective
- have up-to-date budgets
2. Limitations
Continuous budgets can be weakened by incomplete analysis.

 Flexible Budgeting
A) Define Flexible budgets represent budgets that provide the ability to accommodate
comparison with many levels of actual sales or production volume.

B) Purpose Flexible budgets represent adjustable to accommodate changes in actual activity.

C) Appropriate Use Flexible budgets are most appropriate for a firm facing a significant level
of uncertainty in unit sales volumes for next periods.
D) BENEFITS AND LIMITATIONS OF CONTINOUS
1. Benefits
can be displayed on any number of volume levels within the relevant range.

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 allows management to focus on the variances that may be caused by production or
administrative problems that need attention.
Flexible budgets offer managers a more realistic comparison of budget and actual revenue and
cost items under their control.
2. Limitations
Flexible budgets are highly dependent on the accurate identification of fixed and variable costs
and the determination of the relevant range.
 Errors in determination of the relevant range , or misestimates in anticipated output expected
from variable costs .

 Life Cycle Budget

Estimates a product's revenue and expenses over its entire life (value chain), which includes:
 Upstream costs (researches and development).
 Manufacturing costs (production costs).
 Downstream costs (marketing, distribution and customer service).

 The cash budget is a primary tool of short-run financial planning ?

• It allows the financial manager to identify short-term financial needs (and opportunities).
• It will tell the manager the required borrowing for the short term.
• It is the way of identifying the cash-flow gap on the cash flow time line.
• The idea of the cash budget is simple: It records estimates of cash receipts and
disbursements.

 Strategic Management LOS 2015 | Section B.1 Strategic Planning

A) Define
- Is the development and implementation of a sustainable competitive position in which the firm’s
competitive advantage provides continued success.
- Sets overall objectives for an entity and guides the process of reaching those bjectives. It is the
responsibility of upper management .

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 B) Purposes
- guide the company in its efforts to achieve superior performance, competitive advantage, and
maximized shareholder value.
- setting overall organizational objectives and goals and drafting strategic plans. It is a long-term
process aimed at charting the future course of the organization.
- is the design and implementation of the specific steps and processes necessary to reach the
overall objectives.
- It is the responsibility of upper management
C) Limitation
- The effort, time, and expense involved in the process
- The fact that planning based on predictions is not an exact science; due to a variety of factors,
plans may prove to be incorrect and fail
- devoid of fresh ideas and strategic thinking
D) Time Frame
The time frame for strategic planning is normally five to ten years. It may, however, be longer.

 Steps in the Strategic Planning/Management Process (five-stage

process) – M.A.S.I.C
Step 1 Defining/selecting the company’s Mission and addressing the key corporate goals.
Step 2 Analyzing the organization’s external factors & the internal operating environment .
Step 3 Formulating and selecting strategies (SWOT analysis) that, Based on the results of the situational
analysis, upper management develops a group of strategies describing how the mission will be achieved.
Step 4 Developing and Implementing the chosen strategies.
Step 5 Strategic Controls and feedback

 Identify the external factors that should be analyzed during the

strategic planning process
Three environments should be examined, and the three environments are interrelated and shaping the
organizational strategy:
1. The industry in which the company operates,
• Market forces, industry trends, and competition.

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2. The country or the national environment in which the company operates as well as the international
environment,
3. And the wider environment, or microenvironments in which the company operates.
- Economic, demographic, political, legal and regulatory factors, social, cultural, and technical changes.
- Stakeholder groups and their social concerns.
- Globalization trends, emerging markets, and nongovernment organizations (e.g., United Nations, World
Bank, etc.).

 Identify the internal factors that should be analyzed during the

strategic planning process
Analyze the organization’s internal operating environment to identify the organization’s strengths and
weaknesses.
Internal factors (recognition of SWC)
- Are the organization's strengths and weaknesses.
• Strengths are those things that would enhance the organization's competitive position and profitability;
• Weaknesses are those that detract from its competitive position and profitability.

Distinctive competencies are the firm-specific strengths of a company. Valuable distinctive competencies
enable a company to earn a profit rate that is above the industry average.
- The distinctive competencies of an organization arise from its:
• resources (its financial, physical, human, technological, and organizational assets) and
• capabilities (its skills at coordinating resources and putting them to productive use).
Therefore, Internal analysis focuses on reviewing the:
 Resources,  Capabilities, and  Competencies of a company.

 Alignment of Tactics with Long-Term Strategic Goals

Short-term objectives and the tactics to achieve them should flow directly from the organization's strategic
plan and should be designed to achieve the goals and objectives set forth in the strategic plan. The short-
term objectives would be milestones along the road to the achievement of the long-term goals.

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 Strategy, plans and budgets are interrelated and affect one
another?
Strategic analysis is the basis for both long-term and short-term planning.
In turn, these plans lead to the formulation of budgets.
Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this
feedback to revise their strategic plans.
Strategy is the organization's plan to match its strengths with the opportunities in the marketplace to
accomplish its desired goals over the short and long term. Strategy is the starting point in preparing its
plans and budgets.

 Comparison of Strategic and Operational Plans

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 Identify the characteristics of a successful strategic plan.
1. Assists the organization in achieving its long-term goals and objectives.
2. It has well-defined goals consistent with the strategic plan and the mission from which the
plan we derived.
3. It also has SMART objectives, objectives that are:
• Specific
• Measurable
• Achievable
• Realistic
• Timely

 Cost leadership & differentiation & and focus.

a. Cost leadership implies that the company has the lowest product costs in either the entire
industry or within an industry segment.
b. Differentiation implies that the company produces better products or services in the industry
or within an industry segment.
c. Focus implies attention to an industry segment.

 Michael E. Porter’s “The Five Forces Model,”

(1) The risk of entry by potential competitors,
(2) The intensity of rivalry among established companies within an industry,
(3) The bargaining power of buyers,
(4) The bargaining power of suppliers,
(5) The closeness of substitutes to an industry’s products

 Other Planning Tools and Techniques

A) SWOT analysis
- involves Identifying and understanding the organization's strengths and weaknesses (internal
factors) and the opportunities and threats external to the organization.

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- helps the organization utilize and maximize its strengths, minimize and correct its weaknesses,
exploit opportunities, and avoid or minimize risks.
B) Michael Porter's five forces industry analysis involves
- analyzing the organization's environment to identify and minimize threats posed by the
organization's competitors, supplies, and customers.
- The model is Porter's reaction to the ad hoc nature and lack of rigor in the SWOT analysis.
C ) Situational Analysis
- is a systematic collection of tools that an organization may use to analyze and understand both
its internal and its external environments.
- It consists of SWOT analysis and Porter's five forces as well as 5Cs analysis
The 5Cs are : the company, its competitors, its customers, its collaborators, and the climate the
company operates in.
- Company analysis covers the organization's goals and objectives, market position,
performance related to its stated mission, and its product line.
- Competitor analysis looks at the positions of the organization's competition and the threats they
may impose.
- Customer analysis encompasses an understanding of past, present, and future customers and
their demographics.
- Collaborator analysis includes an understanding of agents, supplies, distributors, and business
partners.
- The understanding of organization's climate includes understanding the political, regulatory,
economic, social, cultural, and technological environments
D ) PEST Analysis
Involves an understanding of the organization's political, economic, social, and technological
environments. Its focus is on the opportunities and threats in the organization's environment.
E ) Scenario Planning (also called scenario thinking or scenario analysis)
- is a strategic planning methodology designed to assist the organization in developing flexible
strategic plans “what if” planning.
- It involves simulating or gaming the expected behavior of what are called STEEEPA trends.
STEEEPA is an acronym for plausible alternative social, technical, economic, environmental,
educational, political, and aesthetic trends.
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- These are the key driving forces in the organization's environment. Again, the focus is on
opportunities and threats and developing coping mechanisms.
F ) Competitive Analysis (commonly called competitor analysis)
- focuses on understanding one's competition.
- It includes knowing who the competition really is rather than who the organization thinks it is. It
involves profiling competitors regarding history, products and services, financial condition,
corporate and marketing strategies, facilities, and personnel.
- It also encourages the organization to scan the environment for potential new customers.

G ) Contingency Planning (also called continuity or sustainability planning or plan B)

- Contingency planning is an approach that organizations often use in financial planning and
analysis because it considers several alternative possibilities, specifically those concerning
external variables.

H) The BCG (Boston Consulting Group) Growth Share Matrix looks at the company's
products or services as one of the following: stars, cash cows, dogs, or question marks. Stars
are products or services with high growth rates and high cash generation capabilities. Cash
cows have high cash generation capabilities but low growth rates. Dogs have low cash
generation capabilities and low growth rates. Question marks have high growth rates but low
cash generation capabilities.

 Define key performance indicators (KPIs), and discuss the

importance of these indicators in evaluating a firm.
Key performance indicators (KPls) are measures of factors critical to the success of the
organization. Each KPI requires a defined business process, clear objectives for the process,
quantitative or qualitative measurements for the objectives, and a plan for identifying and
correcting variances from plan.

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 Define the concept of a balanced scorecard and identify its
components ?
Balanced scorecard-A process of compiling and organizing the key performance indicators
(KPIs) of an organization into four segments: a. financial, b. customer, c. internal business
process, and d. learning and growth. - Each KPI can be measured in a specific way so that it
can be managed appropriately

 Identify and describe the perspectives of a balanced scorecard

a. Financial measures - Cover the traditional financial ratios, such as return on equity, sales
growth, return on assets, earnings per share, and the like.
b. Customer satisfaction measures - Focusing on the customer is critical to accomplishing
goals as the customer drives all of a company's revenue. The primary customer outcome
measures include market share, acquisition, satisfaction, retention, and profitability.
c. Internal business process measures - Go beyond simple financial variance measures to
include output measures, such as quality, cycle time, yield, order fulfillment, production planning,
throughput, and turnover.
d. Innovation and learning measures - Focus on becoming efficient and effective at producing
new products. The measures include time to market, percentage of sales from new products,
and new products versus competitor's new products. Learning and growth measures focus on
education and training of personnel and can be measured by training sessions provided,
developing leadership skills, and reducing the number of defects.

 Describe the characteristics of successful implementation and use of

a balanced scorecard.
 the entire organization is aware of it and supports it.
 senior management support the program, even as high as the board of directors.
 It is tied to the organization's strategy and goals, and the performance measures can be
quantified.
 It illustrating the sequence of cause-and-effect relationships.

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 Each business unit and division should be involved in developing its own customized
scorecard.
 It is organized according to the four perspectives, with each selected scorecard measure on a
line and classified within its perspective.
 It identify tradeoffs that managers might make, for instance by reducing R&D spending to
achieve short-run financial goals, or making other tradeoffs that could hurt future financial
performance.
 It is marketed to both management and staff to garner support.
 Scorecard evaluation is more effective when it is used to judge the progress of an individual
business unit relative to the prior year or relative to its goals rather than when used to compare a
manager’s performance with that of other managers or a segment’s performance with that of
other segments.
 a firm have extensive enterprise resource planning6 systems to capture the required
information.
 used to create an environment in which everyone can learn and grow.

LOS 2015 | Section B.3 Forecasting Techniques

 Benefits and Limitations of Regression Analysis

The benefits or advantages of regression analysis are:
 Regression analysis is a quantitative method and as such, it is objective. A given data set
generates a specific result. That result can be used to draw conclusions and make forecasts.
 is an important tool for use in budgeting and cost accounting. In budgeting, it is virtually the
only way to compute fixed and variable portions of costs that contain both fixed and variable
components (mixed costs).
The shortcomings or limitations of regression analysis are:
 To use regression analysis, historical data is required for the variable that we are forecasting
or for the variables that are causal to this variable. If historical data is not available, regression
analysis cannot be used.
 Even when historical data is available, if there has been a significant change in the conditions
surrounding that data, its use is questionable for predicting the future.
 Analysis are valid only for the range of data in the sample
 If the choice of independent variable (s) is inappropriate, the results can be misleading.
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 Benefits and Limitations of Learning Curve Analysis

Benefits of Learning Curve Analysis

 Decisions such as the following can be aided by learning curve analysis:
 Life-Cycle costing – in calculating the cost of a contract, learning curve analysis can ensure
that the cost estimates are accurate over the life of the contract, leading to better bidding.
 Development of production plans and labor requirements – production and labor Budgets
should be adjusted to accommodate learning curves
Limitations of Learning Curve Analysis
 Learning curve analysis is appropriate only for labor-intensive operations involving repetitive
tasks where repeated trials improve performance. If the production process is designed to have
fast set-up times using robotics and computer controls, there is little repetitive labor and thus
little opportunity for learning to take place.
 The learning rate is assumed to be constant.
 Third, a carefully estimated learning curve might be unreliable because the observed
change in productivity in the data used to fit the model was actually associated with factors other
than learning.

 Benefits and Limitations of expected value

Benefits of Expected Value

Expected value analysis forces managers to think of all the possibilities that could happen with
each decision, and to evaluate decisions in a more organized manner.
Limitations of Expected Value
It depends on repetitive trials, but in reality, most business decisions involve only one trial.

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 LOS 2015 | Section B.6 Top-Level Planning and analysis
 Purpose of Pro Forma
(Income Statement & Balance Sheet & Cash Flow)
The pro forma income statement is used to decide whether the budgeted activities will result
in an acceptable level of income. If the initial pro forma income shows a loss or an unacceptable
level of income, adjustments can be made to the component parts of the master budget.

Other strategic objectives can also be observed from the pro forma income statement, such as
desired rates of return, debt ratio, and the interest coverage ratio (times interest earned). The
adequacy of earnings per share can also be observed from the pro forma income statement
Once the company’s dividend policy has been factored in to determine the amount of dividends
to be paid, the amount of projected retained earnings will then be added to its current balance
sheet to create the pro forma balance sheet, information from the company’s capital expenditure
budget and cash budget will also be used to help formulate the pro forma balance sheet, Once
the pro forma income statement and balance sheet
The pro forma balance sheet is prepared using the cash and capital budgets and the pro
forma income statement.
- The pro forma balance sheet is the beginning-of-the-period balance sheet updated for
projected changes in cash, receivables, payables, inventory, etc.
- If the balance sheet indicates that a contractual agreement may be violated, the budgeting
process must be repeated.
a) For example, some loan agreements require that owners' equity be maintained at some
percentage of total debt or that current assets be maintained at a given multiple of current
liabilities.
The pro forma statement of cash flows classifies cash receipts and disbursements depending
on whether they are from operating, investing, or financing activities.
1) The direct presentation reports the major classes of gross cash operating receipts and
payments and the difference between them.
2) The indirect presentation reconciles net income with net operating cash flow.

Section D. Cost Management ( 20% -Levels A,B, and C ) ‫تابعونا | الجزء القادم‬

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