ICMA Pakistan MANAGEMENT ACCOUNTING (G-3)

FORECASTING
CONCEPT BUILDING QUESTIONS (CBQs)

CBQ#1 Adapted from MATZ & UZRY

A controller is interested in an analysis of the fixed and variable costs of electricity as related to direct l
to direct labor hours. The following data have been accumulated:

ELECTRICITY DIRECT
MONTH COST LABOUR HOURS
November…………………….. $1,548 297
December…………………….. 1,667 350
January……………………….. 1,405 241
February……………………… 1,534 280
March………………………… 1,600 274
April………………………….. 1,600 266
May…………………………… 1,613 285
June…………………………... 1,635 301

Required:
(1) The amount of fixed overhead and the variable cost ratio, using (a) the high and low points method,
(b) a scatter graph with trend line fitted by inspection, and (c) the method of least squares. (Round
off computation to three decimal places.)
(2) The standard error of the estimate.
(3) The coefficient of correlation (r) and the coefficient of determination (r²)

CBQ#2 Adapted from MATZ & UZRY

The custodial supplies expense and guest days of occupancy at Hotel Excelsior for a 6 month period are:
Custodial Guest
Supplier Days of
Expense Occupancy
January…………………………………… $9,255 21,500
February………………………………….. 9,170 21,000
March…………………………………….. 9,561 23,300
April……………………………………… 8,949 19,700
May………………………………………. 9,017 20,100
June………………………………………. 9,493 22,900
Required:
(1) The amount of fixed and variable custodial supplies expense per guest day of occupancy, using (a) the
high and low points method, (b) a scatter graph with trend line fitted by inspection, and (C) the
method of least squares.
(2) The standard error of the estimate.
(3) The coefficient of correlation (r) and the coefficient of determination (r²).

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CBQ#3 Adapted from MATZ & UZRY

A company making tubing from aluminum billets uses a process in which the billets are hated by
induction to a very high temperature before being put through an extruding machine that shapes the
tubing from billets. The inducer, a very large coil into which the billet is placed, must sustain a great flow
of current to heat the billets to the desired temperature. Regardless of the number of billets to be
processed, the coil is kept on during the entire operating day because of the time involved in starting it up.
The cost department wants to charge the variable electricity cost to each billet and the fixed electricity
cost to factory overhead. The following data have been assembled:
Number Cost of Number Cost of
Months Of billets Electricity Month Of billets Electricity
January……………….. 2,000 $400 July…………………… 1,400 $340
February……………… 1,800 380 August……………….. 1,900 390
March……………….... 1,900 390 September……………. 1,800 380
April………………….. 2,200 420 October………………. 2,400 440
May…………………... 2,100 410 November…………….. 2,300 430
June…………………... 2,000 400 December…………….. 2,200 420
Required:
(1) A fixed-variable expense analysis using the method of least squares.
(2) A graph indicating the results calculated.
(3) The standard error of the estimate.
(4) The coefficient of correlation (r) and the coefficient of determination (r²).

CBQ#4 MA SPRING 2013 (ICMAP)

The management of Good Luck Company has asked for help in selection of the appropriate
activity measures to be used in estimating electricity cost while preparing budget for one of
its plants at Lahore. The information as given below shows utility expenses incurred in the
past year with two potential activity measures.
Month Utility Cost (Rs.) Machine Hours Labour Hours
January 160,000 2,300 4,200
February 157,000 2,250 4,000
March 161,000 2,400 4,360
April 155,000 2,250 4,000
May 153,000 2,160 4,050
June 154,000 2,240 4,100
July 152,000 2,180 4,150
August 153,000 2,170 4,250
September 158,000 2,260 4,150
October 165,000 2,500 4,500
November 166,000 2,540 4,600
December 162,000 2,450 4,400
Total 1,896,000 27,700 50,760
Required:
(a) Compute the coefficient of correlation ‘r’ and the coefficient of determination ‘r2’ between
the cost of utility and each of the two activity measures. 08
(b) Identify which of the two activity measures should be used as a basis to estimate the
allowable cost of utility. 03
(c) Using the activity measure selected in requirement (b) above, compute an estimate of
fixed utility cost and the variable utility rate by the method of least squares. 04

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CBQ#5
YEARS QUARTER #1 QUARTER #2 QUARTER #3 QUARTER #4
2010 ACTUAL 24,000
TREND __

2011 ACTUAL 8,000 30,000 60,000 20,000

TREND __ 30,000 31,000 35,000

2012 ACTUAL 20,000 50,000 80,000 40,000

TREND 40,000 45,000 50,000 54,000

2013 ACTUAL 40,000 62,000 92,000 ???

TREND 57,000

Using additive model, seasonal variations have been determined as follows:

SEASONAL VARIATIONS -18,250 +2,750 +29,750 -14,250
Note: Round off the trend up to ‘0’ decimal place.

REQUIRED :
Predict the sales forecast of Quarter #4 of 2013 and all quarters of 2014.

CBQ#5(A)
YEARS QUARTER #1 QUARTER #2 QUARTER #3 QUARTER #4
2010 ACTUAL 40,000
TREND __

2011 ACTUAL 15,000 55,000 95,000 40,000

TREND __ 51,250 54,375 61,875

2012 ACTUAL 40,000 90,000 150,000 80,000

TREND 73,125 85,000 96,250 106,875

2013 ACTUAL 90,000 125,000 180,000 ???

TREND 115,000

Using additive model, seasonal variations have been determined as follows:

SEASONAL VARIATIONS -36,000 +6,000 +60,000 -30,000
Note: Round off the trend up to ‘0’ decimal place.

REQUIRED :
Predict the sales forecast of Quarter #4 of 2013 and all quarters of 2014.

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CBQ#6

ACTUAL TREND Seansonal%

2012 Q1 600
Q2 840
Q3 420 650 0.646
Q4 720 657.50 1.095
2013 Q1 640 660.00 0.970
Q2 860 662.50 1.298
Q3 420
Q4 740

Assume Seansonal % for Q3/2013 0.628 ; and Q4/2013 1.092 and Q1 & Q2 of 2014 are 0.98 & 1.309

REQUIRED : Compute Forecast sales of all quarters of 2014

CBQ#6(A)
ACTUAL TREND Seansonal%
2012 Q1 1250
Q2 1200
Q3 800 1191.25 0.67
Q4 1500 1257.50 1.19
2013 Q1 1280 1325.00 0.97
Q2 1700 1317.50 1.29
Q3 840
Q4 1400

Assume Seansonal % for Q3/2013 0.60 ; and Q4/2013 1.30 and Q1 & Q2 of 2014 are 0.97 & 1.45

REQUIRED : Compute Forecast sales of all quarters of 2014

CBQ#6(B)
W plc is preparing its budgets for next year. The following regression equation has been found to be a
reliable estimate of W plc’s deseasonalised sales in units :
Y = 10x +420
Where y is the total sales units and ‘x’ refers to the accountancy period. Quarterly seasonal variations
have been found to be :

Quarter #1 Quarter #2 Quarter #3 Quarter #4

+10% +25% - 5% - 30%
In accounting period 33 (which is quarter 4) identify the seasonally adjusted sales units???

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CBQ#7(A)
A small business operating Holiday homes in Scotland wishes to Forecast next year‘s sales fpr
the budget, using moving averages establish a straight –line trend and seasonal variations. Next
year is 20 X 7. The accountant has assumed that sales are seasonal, with a summer session and a
winter season each year.
Seasonal sales for the past 7 years have been as follows:

Sales
Summer Winter
$000 $000
20X4 124 70
20X5 230 180
20X6 310 270
20X7 440 360
20X8 520 470
20X9 650

Required
a. Calculate a trend line based on two-season moving average
b. Calculate the average increase in sales each season
c. Calculate seasonal variations in sales
d. Use this data to prepare a sales forecast fro each season in 20Y0.

CBQ#7(B)
Consider a business with the following actual results in a year.

Year Quarter Units Sold

20X1 1 65
20X1 2 80
20X1 3 70
20X1 4 85

The trend is expected to increase by 10 units per month and has been calculated as 60 units for the first
quarter. This provides the following table:

Year Quarter Units Sold Trend

20X1 1 65 60
20X1 2 80 70
20X1 3 70 80
20X1 4 85 90

Required
How might these figures be used to develop a time series model in order to forecast unit sales in each
quarter of year 2, using
a. An additive modeling approach and
b. A multiplicative modeling approach?

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CBQ#7(C) Adapted from ICAP Module ‘F’ 2003

It is mid-June and the new managing director of Storrs Plc is reviewing sales forecast for quarter 3 of
2003, which begins on 1 July, and for Quarter 4. The company manufactures garden furniture and
experiences seasonal variation in sales, which has mode forecasting difficult in the past. Sales for the
last two calendar years were as follows.

Year Quarter1 Quarter2 Quarter3 Quarter4

2001 Rs. 2,700,000 Rs.3,500,000 Rs.3,400,000 Rs.3,000,000
2002 Rs.3,100,000 Rs.3,900,000 Rs.3,600,000 Rs.3,400,000

Sales in quarter 1 of 2003 were Rs. 3,600,000. There is two weeks to go until the end of Quarter 2 and
the managing director of Storrs Plc is confident that it will achieve sales of Rs. 4,400,000 in this quarter.
The existing sales forecast for the two remaining quarters of the year were made by the sales
director (who has been with the company for the several years) during last year’s budget-setting
process. These forecasts are for Rs. 3,800,000 for Quarter 3 and for Rs. 3,600,000 for Quarter 4. Budgets
within Storrs Plc have traditionally has been prepared and agreed by the directors of the company
before being implemented by junior managers.

As a basis for revising the sales forecasts for the Two remaining quarters of 2003, the management
accountant of Storrs Plc has begun to apply time series analysis in order to identify the seasonal
variation is sales. He has so far calculated the following centred moving averages, using a base period of
four quarters.

Year Quarter1 Quarter2 Quarter3 Quarter4

2001 Rs.3,200,000 Rs.3,300,000
2002 Rs.3,375,000 Rs.3,450,000 Rs.3,562,000 Rs.3,687,500

Required
a. Using the sales information and centred moving averages provided and assuming an additive
model, forecast the sales of Storrs Plc for Quarter 3 and Quarter 4 of 203, and comment on the
sales forecast made by the sales director.
(Note: You are not required to use regression analysis)
b. Discuss the limitation of the sales forecasting method use in part(a)
c. Discuss the relative merits of top-down and bottom-up approaches to budget setting.

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Tables for CBQ#1

01 02 03 04 05 06 07
Month Direct Difference from Electricity Difference Squared (2) x (4) (4) squared
labour averages of Cost from Average
Hours 287 Hours of $1, 575
Electricity Cost
November 297 10 $ 1,548 $ - 27 100 $ -270 $ 729
December 350 63 1,667 92 3,969 5.769 8,464
January 241 -46 1,405 -170 2,116 7,820 28,900
Febuary 280 -7 1,534 -41 49 287 1,681
March 274 -13 1,600 25 169 -325 625
April 266 -21 1,600 25 441 -525 625
May 285 -2 1,613 38 4 -76 1,444
June 301 14 1,635 60 196 840 3,600

Total 2,294 -2* $ 12,602 $ 2* 7,044 $ 13,547 $ 46,068

¶
01 02 03 04 05
Month Direct Electricity Expected Difference (4) squared
labour Cost average
Hours Electricity Cost
November 297 $ 1,548 $ 1,594 $ -46 $ 2,116
December 350 1,667 1,696 -29 841
January 241 1,405 1,486 -81 6,561
Febuary 280 1,534 1,561 -27 729
March 274 1,600 1,550 +50 2,500
April 266 1,600 1,535 +65 4,225
May 285 1,613 1,571 +42 1,764
June 301 1,635 1,602 +33 1,089

Total 2,294 $ 12,602 $ 12,595 $ +7 $ 19,825

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Table for CBQ#2

(1) (2) (3) (4) (5) (6) (7)

Month Guest Difference from Custodial Difference from (2) (2) x (4) (4)
days of average of 21,417 Supplies average of $ Squared Squared
Ocupancy days Expense 9,241 custodial
supplies expense
January 21.500 83 $ 9,255 $ 14 6,889 $ 1,162 $ 196
Febuary 31,000 -417 9,170 -71 173,889 29,607 5,041
March 23,300 1,883 9,561 320 3,545,689 602,560 102,400
April 19,700 -1,717 8,949 -292 2,948,089 501,364 85,264
May 20,100 1,317 9,017 -224 1,734,489 295,008 50,176
June 22,900 1,483 9,403 252 2,199,289 373,716 63,504

Total 128,500 2 55,445 $ -1 10,608,334 $ 1,803,417 $ 306,581

1 2 3 4 5
Month Guest Custodial Expected Difference Squared
days of Supplies Average (2) – (3)
occupanc Expense Custodial
y Supplies
Expense
January 21,500 $ 9,255 $ 9,255 0 0
Febuary 21,000 9,170 9,170 0 0
March 23,300 9,561 9,561 0 0
April 19,700 8,949 8,949 0 0
May 20,100 9,017 9,017 0 0
June 22,900 9,493 9,493 0 0

Total 128,500 $ 55,445 $ 55,445 0 0

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Table for CBQ#3

1 2 3 4 5 6 7
Month Billets Difference from Electricity Difference 2) 2x4 4) Squared
average of 2,000 Cost from Average Squared
Billets of $400
Electricity Cost
January 2,000 -0 $ 400 -0 -0- -0- -0-
Febuary 1,800 -200 380 $-20 40,000 $ 4,000 $ 400
March 1,900 -100 390 -10 10,000 1,000 100
April 2,200 +200 420 +20 40,000 4,000 400
May 2,100 +100 410 +10 10,000 1,000 100
June 2,000 -0 400 -0 -0- -0- -0-
July 1,400 -600 340 -60 360,000 36,000 3,600
August 1,900 -100 390 -10 10,000 1,000 100
September 1,800 -200 380 -20 40,000 4,000 400
October 2,400 +400 440 +40 160,000 16,000 1,600
November 2,300 +300 430 +30 90,000 9,000 900
December 2,200 +200 420 +20 40,000 4,000 400
Total -0- $ 4,800 -0- 800,000 $ 80,000 $ 8,000

1 2 3 4 5
Month No. of Cost Of Expected Difference Squared
Billets Electricity average Cost (2) - (3)
Of Electricity
January 2,000 $ 400 $ 400 -0- -0-
Febuary 1.800 380 380 -0- -0-
March 1.900 390 390 -0- -0-
April 2.200 420 420 -0- -0-
May 2,100 410 410 -0- -0-
June 2,000 400 400 -0- -0-
July 1,400 340 340 -0- -0-
August 1,900 390 390 -0- -0-
September 1,800 380 380 -0- -0-
October 2,400 440 440 -0- -0-
November 2,300 430 430 -0- -0-
December 2,200 420 420 -0- -0-

Total 24,000 $ 4,800 $ 4,800 -0- -0-

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Solution CBQ#7(A)

SEASON 2-SEASON Seasonal Centered

& ACTUAL MOVING Moving Moving Seasonal
YEAR SALES AVERAGE Average Average Variation
Sum 04 124,000
194,000 97,000
Wint 04 70,000 123,500 -53,500
300,000 150,000
Sum 05 230,000 177,500 +52,500
410,000 205,000
Wint 05 180,000 225,000 -45,000
490,000 245,000
Sum 06 310,000 267,500 +42,500
580,000 290,000
Wint 06 270,000 322,500 -52,500
710,000 355,000
Sum 07 440,000 377,500 +62,500
800,000 400,000
Wint 07 360,000 420,000 -60,000
880,000 440,000
Sum 08 520,000 467,500 +52,500
990,000 495,000
Wint 08 470,000 527,500 -57,500
1120,000 560,000
Sum 09 650,000

The Average increase in sales each season in the trend line is:
527,500 – 123,500 / 9-1 = 50,500
Seasonal Variations (Additive Model):
YEAR SUMMER WINTER
20X4 -53,500
20X5 +52,500 -45,000
20X6 +42,500 -52,500
20X7 +62,500 -60,000
20X8 +52,500 -57,500
+210,000 -268,500
Summer Winter Total
Number of measurements 4 5
Average Seasonal Variation +52,500 -53,700 -1,200
Reduce to ‘0’ +0.6 +0.6 +1.20
Adjusted Seasonal Variation +53,100 -53,100 0.0

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