STUDY UNIT ONE

BUDGETING CONCEPTS

AND FORECASTING TECHNIQUES

(23 pages of outline)

Planning, Budgeting, and Forecasting.

A budget is a realistic plan for the future that is expressed in quantitative terms. A budget is many tools in one; it is a planning tool, a control tool, a communication tool, and a motivational tool.

As such, the area of budgeting, as tested on the CMA exam, is a composite of theory and calculations. Some of the calculations have many steps, thus making budgeting problems among the most-missed questions on the exam. Alternatively, budgeting should not be viewed as a difficult area; the concepts are easy, but you need to pay close attention to detail as you work numerical questions.

This study unit is the first of two on planning, budgeting, and forecasting. The relative weight assigned to this major topic in Part 1 of the exam is 30%. The two study units are

Study Unit 1: Budgeting Concepts and Forecasting echniques

Study Unit 2: Budget Methodologies and Budget Preparation

After studying the outline and answering the questions in this study unit, you will have the skills necessary to address the following topics listed in the lCMA's Learning Outcome Statements:

Part 1 – Section A.1. Budgeting concepts

The candidate should be able to:

a. describe the role that budgeting plays in the overall planning and performance evaluation process of an organization

b. explain the interrelationships between economic conditions, industry situation, anda firm's , plans and budgets .

c. identify the role that budgeting plays in formulating short-term objectives and planning and controlling operations to meet those objectives

d. demonstrate an understanding of the role that budgets play in measuring performance against established goals

e. identify the characteristics that define successful budgeting processes

f. explain how the bUdgeting process facilitates communication among organizational units and enhances coordination of organizational activities

g. describe the concept of a controllable cost as it relates to both budgeting and performance evaluation

h. explain how the efficient allocation of organizational resources is planned during the budgeting process

i. identify the appropriate time frame for various types of budgets .

j. identify who should participate in the bUdgeting process for optimum success

k. describe the role of top management in successful budgeting

l. identify best practices guidelines for the budget process

m. demonstrate an understanding of the use of cost standards in budgeting

n. differentiate between ideal (theoretical) standards and currently attainable (practical) standards

o. differentiate between authoritative standards and participative standards .. .

p. identify the steps to be taken in developing standards for both direct material and direct labor

q. demonstrate an understanding of the techniques that are used to develop standards such as activity analysis and the use of historical data'

r. discuss the importance of a policy that allows budget revisions that accommodate the impact of significant changes in budget assumptions '

s. explain the role of budgets in monitoring and controlling expenditures to meet strategic objectives .

t. define budgetary slack and discuss its impact on goal congruence

Part 1 - Section A.2. Forecasting techniques

The candidate should be able to:

. ,

a. demonstrate an understandinq of a simple regression equation and the measures associated with it' .

b. define a multiple regression equation and recognize when multiple regression is an appropriate tool to use for forecasting ,

c. calculate the result ofa simple regression equation

d. demonstrate an understanding of learning curve analysis

e. calculate the results under a cumulative average-time learning model and under an incremental unit-time learning model ' ,

f. demonstrate an understanding of moving averages, weighted moving averages, and exponential smoothing, and calculate forecasts using these methods

g. demonstrate an'understanding of time series analyses, including objectives and patterns, i.e., trend, cyclical, seasonal, and irregular" ,

h. list the benefits and shortcomings of regression analysis, learning curve analysis, and time series analysis

i. calculate the expected value of random variables

j. identify the benefits and shortcomings of expected value techniques'

k. 'use probability values to estimate future cash flows .

l. identify the uses of sensitivity analysis

m. perform a sensitivity analysis with different values for the probabilities of the states of- nature and/or the payoffs ;.

n. identify the benefits and shortcomings of sensitivity analysis

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