2 2 financial planning

Sales forecasts predict future revenues based on past sales figures.

False. Sales forecasts commonly focus on what will happen in the future, though they often use past data to make predictions.

Consumer trends refer to patterns of behaviour and preferences among consumers regarding their purchases of products.

True. During periods of economic growth, increased consumer incomes will lead to higher than forecast sales for most normal and luxury goods.

Inflation is the general increase in prices over time, which reduces consumers' spending power.

Increased levels of unemployment are a key cause of reduced spending in the economy, which can lead to lower sales than forecast.

An exchange rate is the value of one currency in terms of another.

False. Competitor actions should be considered in sales forecasts.

Sources of data for sales forecasts include:

Experience bias is the forming of opinions about the future based on experiences in the past.

Sales volume is the number of units sold by a business.

Sales revenue is the value of the units sold by a business.

False. Sales revenue usually increases as the sales volume increases.

Fixed costs are costs that do not change with the level of output and have to be paid even if output is zero.

Formula.

Variable costs are costs that are directly linked to the level of output. They increase as output increases and decrease as output decreases.

Formula.

False. Total costs usually increase as the sales volume increases.

Contribution refers to a product’s selling price minus the variable costs directly involved in producing that unit.

True. Average unit costs usually decrease as the sales volume increases as fixed costs are spread across more units.

The break even point is the level of output at which total revenue equals total costs, resulting in neither profit nor loss.

False. The break even point indicates the level of output at which neither profit nor loss is made.

Formula.

True. Each subsequent unit sold past the break even point generates profit for a business.

The margin of safety is the difference between actual output and the break even level of output.

A break even chart shows the break even point, fixed costs, total costs, revenue over a range of output, and the margin of safety.

False. Fixed costs remain constant regardless of the level of output.

Contribution refers to a product’s selling price minus the variable costs directly involved in producing that unit.

False. Break even analysis is less useful when businesses produce more than one product.

True. A key limitation of break even analysis is that it assumes all output is sold.

A budget is a financial plan that a business sets for costs and revenue.

True. Budgeting requires different parts of a business to operate as part of a coordinated whole.

True. Budgets are usually set annually and then monitored on a monthly basis.

A historical figure budget is based on past data, such as sales and costs from previous years.

Zero based budgeting is an approach where budgets are not allocated, requiring all spending to be justified.

A budget variance is the difference between a budgeted figure and the actual figure achieved by the end of the budgetary period.

False. A favourable variance means actual figures are better than budgeted figures.

The purpose of variance analysis is to identify reasons for differences between actual and budgeted figures, aiding in decision-making and performance evaluation.

Formula.

When the actual profit figure achieved is worse than the budgeted profit figure, an adverse variance exists.