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Forecasting in Accounting

See Also:
ProForma Financial Statements
Cost Center
Weighted Average Cost of Capital (WACC)
Percent of Sales Method
Standard Costing System
Comparison Analysis
Budgeting vs Forecasting

Forecasting in Accounting

Forecasting in accounting refers to the process of using current and historic cost data to predict future costs. Forecasting is important for planning purposes – it is necessary to estimate and plan for costs that will be incurred prior to actually incurring them. There are several common tools and techniques used for forecasting in the field of cost accounting, including the following:

Budgeting

Budgeting is the process of preparing a budget in order to plan for revenues and expenses in an upcoming fiscal period.

A budget has five primary objectives. These include the following:

  1. Planning for the upcoming fiscal period
  2. Facilitating coordination and communication of these plans throughout the organization
  3. Allocating resources within an organization
  4. Managing financial and operational performance during the fiscal period
  5. Evaluating performance and providing goal-based incentives to management and other personnel inside the organization

Budgets are prepared using current and historic data and estimations about future trends. Budgets can also be prepared using the traditional method or the zero-based method. The tradition method of budgeting typically uses the previous period’s budget at a starting point for the upcoming period’s budget. The zero-based budget method essentially requires starting from scratch each period.

High-Low Method

You can use the high-low method is a technique for cost estimation in forecasting. It is a rather simple technique and it is less accurate than more sophisticated cost estimation techniques, such as regression analysis.

Using the high-low method requires having a set of data relating costs to cost-driver activities. You take the highest cost and the highest cost-driver activity level and the lowest cost and the lowest cost-driver activity level from the data set. Then use these four pieces of data to calculate the slope of the line that connects the two points. Finally, you compute the intercept using the slope and one of the points. This gives you the high-low cost equation for that particular cost-incurring activity.

Regression Analysis

Regression analysis is a method of relating a dependent variable to an independent variable. The analysis essentially computes how much of the variance in the dependent variable is due to variations in the independent variable. Regression analysis requires having a set of data for both the dependent and independent variables. The best way to do a regression analysis is in a computer program.

Regression analysis can be either simple or multiple. Simple regression analysis uses one independent variable and one dependent variable. Whereas, multiple regression analysis uses several independent variables and one dependent variable. The result of a regression analysis is an equation that can be used to forecast costs based on certain estimates of independent variable activity.

If you need help creating an accurate forecast, then download our free Goldilocks Sales Method whitepaper to project accurately.

Forecasting in Accounting

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Forecasting in Accounting

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Controller Duties

See Also:
Controller Definition
Controller
Separation Of Duties
Controller Vs Comptroller
Duties Of A Financial Controller
Controller Vs. CFO

Financial Controller Duties

The duties of a financial controller are to oversee the accounting functions within an organization and internal controls at the highest level of management. Financial controller responsibilities are to work alongside the executive management team and provide informative business financial information and coordinate business financial planning and budget management functions. Financial controller duties are to provide accurate, secure and timely recording of business activities and the ability to report of those business activities. The role of a controller can vary depending on a size of an organization. Controllers in smaller organizations may often have a range of responsibilities while the responsibilities of a financial controller in larger organizations may have limited requirements due to a larger executive accounting team.

(NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFO’s. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)

Financial Controller Requirements

Financial controller requirements can differ depending on the size of an organization. Businesses may require a controller to have a certain number of years of experience within the industry. This is important for the controller to understand the business processes for interpreting and providing financial analysis reports. A controller must have an extensive knowledge and understanding of accounting and finance. Controllers are required to properly document all financial functions. For this reason, it is becoming more importantly necessary for a controller to be knowledgeable of accounting software packages and have a basic, if not advanced, understanding of technology infrastructure. A controller should have professional written and verbal communication and interpersonal skills.

Financial controller education requirements are determined by individual businesses. A master’s degree in accounting or a master’s degree in business administration is essential for a financial controller role. A controller resume should document the level of education that a controller has studied and the number of years of experience. A financial controller education can include financial controller training that an individual has taken. It is important for a controller to have had courses in statistics and management.

In addition, ongoing training is essential for controllers in order to stay updated with any significant changes to the generally accepted accounting principles (GAAP). For individuals inspiring to learn how to become a financial controller, there are designations offered that would aid in the chances of acquiring this executive position. Those designations are The Institute of Management Accountants offers the Certified Public Accountant (CPA) and the Certified Management Accountant (CMA) designations for financial managers specializing in accounting.

Controller Compensation

Controller compensation will weigh on a controller’s education level and industry expertise. Since there are a range of skills that a controller must possess, a controller’s experience level and their communication abilities contribute to determining controller salary. Employers will commit to the controller job description salary prior to filling the position. In the United States, the average expected controller compensation was $165,661.00 in November 2009.

Controller Career

For individuals seeking a controller career, a bachelor’s degree in finance or accounting is the preliminary requirement. The advanced education, such as a master’s degree in business administration, is a fundamental financial controller education requirement. That will set you apart from the others. This is because of the analytical skills that are developed with this education level. Industry expertise is another crucial requirement for a financial controller career. Continuing education programs are a resource for acquiring knowledge of the latest financial analysis methods and technology that are beneficial to an ongoing controller career path.

controller duties

controller duties

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Cost Accounting

See Also:
Accrual Based Accounting
The Future of the Accounting Workforce
Absorption vs Variable Costing
Implementing Activity Based Costing
Process Costing
Management Accounting

Cost Accounting Definition

The common cost accounting definition is accounting which seeks to create then compare a budget to the actual cost of doing business. In cost accounting, budgeting aids in decision making with regards to minimizing costs and increasing profit.

Cost Accounting Description

Cost accounting is a form of managerial accounting and is used for the benefit of internal managers. Due to this fact reports need not follow GAAPFASB, or other accounting standards and procedures. Cost accounting, ultimately, is focused on reducing costs and increasing profit. Costs, for the purpose of creating uniform reports, are measured in one form of currency.

The purpose of cost accounting is strategic decision making. With effective cost accounting measurements managers can make key decisions on price, product offerings, technologies, and controls for short term and long term planning.

The foundation of this purpose is measurement and analysis. With incomplete records come partial decisions, some managers must take great effort to ensure proper data procedures. After completing this daunting task, managers must then derive accurate decisions based on quantitative and qualitative analysis of internal records and external variables.


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Cost Accounting Techniques

There are many methods for a cost accounting standards guide. Pivotal cost accounting techniques include the following:

Cost accounting is an extensive field. The cost accounting basics, however, are simply described as the following:

These explanations may fall under a different name, however the concept and purpose behind most cost accounting terms will remain similar.

Cost Accounting Example

For example, Stan is the CFO for a financial services company called Financeco. Stan believes the company is spending too much in total costs for servicing one customer. As a result, he wants to reduce the total cost of servicing one customer to increase the profit received from each one. A trained CFO is an authority for any situations that require cost accounting solutions.

So, Stan begins by looking at the company cost of goods sold (COGS). He sees satisfactory results but wonders if he can do better. While looking at this he realizes that a large portion of these expenses come from processing customer paperwork and monthly reports. He begins to study, measure results, and form a plan of action.

Stan finds that the company makes $2400 per year off of the average customer. In comparison, he also finds that the company spends a total of $400 per year in paperwork processing. He studies the experience of the customer and realizes a main flaw.

Financeco uses paper-based record keeping instead of computerized databases. On the front end, by encouraging the customer to apply to Financeco online the company can slash the first half of total paperwork processing by 30% ($200 X 30% = $60 cost reduction per customer). To encourage this he suggests waiving the $25 application fee for clients who apply online.

Stan’s Plan

On the back end, Stan believes he can convince clients to “go paperless” with monthly reports. By providing clients with an online system to view reports he can completely remove the other half of paperwork processing. To do this, Stan suggests a new portal to their website. With a one time capital expenditure of $20,000 he can remove $200 of yearly costs per customer. Stan suggests that the company market this change as “Financeco going Green”. For customers not motivated by the environmental benefits of the new system, give a temporary price reduction. A per client, year-end rebate can be budgeted to each sales agent on an as needed basis.

Stan estimates that this change will cost the company approximately $40,000 ($20,000 for web design and an additional $20,000 for training hr for the transition.). He creates his report and prepares to meet with the company’s Board of Directors.

Stan’s plan is a welcomed change to the Financeco Board of Directors. They embrace the plan and begin making the necessary changes to company processes.

Cost accounting systems, cost accounting software, and other tools will ease the task of the manager. Without a foundation of measurement and analysis, however, Stan would have never experienced success in his project.

If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.

cost accounting, cost accounting techniques, cost accounting definition

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Capital Budgeting Phases

See Also: Capital Budgeting Methods

Capital Budgeting Phases

The phases of the capital budgeting process include the following:

  • Description of the need or opportunity
  • Identification of alternatives
  • Evaluation of the options and the relevant cash flows of each
  • Selection of best alternative
  • Conducting a post-completion audit of the projects.

Examples

To identify capital projects, refer to functional needs or opportunities. Although many are also identified as a result of risk evaluation or strategic planning. Some typical long-term decisions include whether or not to:

  • Buy new office equipment, cars or trucks
  • Add to or renovate existing facilities, including the purchase of new capital equipment/machinery
  • Expand plant or process operations
  • Invest in facilities for a new product line or to expand services
  • Continue or discontinue an existing product line
  • Replace existing capital equipment/machinery with new equipment/machinery
  • Invest in software to meet technology-based needs or systems designed to help improve process and/or efficiency
  • Invest in R&D or intangible assets
  • Build or expanding a foreign or satellite operation
  • Reorganize assets or services
  • Acquire another company.

Refer to capital investment (expenditure) decisions as capital budgeting decisions. They involve resource allocation, particularly for the production of future goods and services, and the determination of cash out-flows and cash-inflows, which need to be planned and budgeted over a long period of time. Because of the complexity of this accounting issues, get involved yourself right from the beginning. Guide them through the whole process.

Project Evaluation

Develop an objective methodology with the upper management. Then evaluate alternate capital projects on a reasonable basis. Consider both quantitative and qualitative issues and use the whole organization as a resource.

Marketing should provide data on sales trends, new demand and opportunities for new products. Managers at every level should be identifying resources that are available to upper-management that may lead to the use of existing facilities to resolve the need/take advantage of the opportunity. They should also be communicating any needs they/their departments or divisions have that should be part of the capital decision.

Financial analysts should also identify the target cost of capital, the evaluation of startup costs, and the calculation of cash flows for those projects chosen for evaluation purposes. If your financial analysts are absent, then refer to qualified external financial experts. By calculating the appropriate discount rate and calculating conservative cash flows, you are contributing to a critical part of this process. As a result, have an independent accounting firm look at the project/these issues impartially. Estimation bias can be dangerous.

Evaluate (predict) how well each capital asset alternative will do. Then, determine whether the net benefits are consistent with the required capital allocation. When doing this, consider that most firms face the scarcity of resources.

capital budgeting phases

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Budgeting vs Forecasting

See Also:
Forecasting
Comparison Analysis

Budgeting vs Forecasting

The budgeting vs forecasting process has been a good discussion between financial professionals. The argument of whether they serve the same purpose or if one is better than the other has lead to some interesting debates. The term has been used several times interchangeably. However let’s explore why this is incorrect by identifying the budget vs forecast difference. When it comes to planning and grading the company’s financial health, they are both tools that can be used by companies. Their managers to do just that. However, the proper way to use them both is in concert with one another and not particularly as a substitute for one another.

Budgeting

What is budgeting, definition-wise? It is the process used to compose a plan or create an estimate during a prior year or at the beginning of a current year to help manage and control the income and expenditures of the company for that year. Some have even defined a budget to be a road map or financial guide that recognizes the income of the company, while detailing the expense allowances with a not-to-exceed expectation for that given year. Now let’s examine the definition of forecasting to compare the differences between the budgeting and forecasting process.

Forecasting

Forecasting is another financial tool commonly used to help determine the financial status of a company. The meaning of financial forecasting is quite different from that of budgeting. Where the budget is used as a financial planner, the forecast uses this plan and compares it to the current financial direction of the company. They do this to predict where the company will end up by the end of that year. In other words, use the forecast to see if the company will meet or exceed the expectations from the budget allowing the managers and controllers to set future goals. They also use forecasts to identify trends that are used to grade the company’s financial position. They both seem to be very resourceful tools. Instead of comparing financial forecast vs budget, the more important discussion should be which tool is more effective.

Which is More Important?

So which tool in the financial forecast versus budget debate is more important? Let’s answer a few questions first. Can a business run productively without a budget, a plan of action for each year? Some do. However, to run a successful business without monitoring your financial status throughout the year to predict its financial grade by the end of the year can be very difficult. Budgeting can be a good tool to use to help plan the future of the business; however a greater predictor of future behavior is past behavior. The purpose of investing time to create a financial forecast is to predict the future based upon certain assumptions. In addition, use the past to defend those assumptions. Both tools are necessary for a business to be successful. In short, a budget sets the company’s goals while a forecast defines its expectations.

If you need help creating an accurate forecast, then download our free Goldilocks Sales Method whitepaper to project accurately.

budgeting vs forecasting

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Capital Budgeting Methods

Capital Budgeting Methods

“Most small to medium sized companies have no idea how to approach capital investments. They treat it as if it were an operating budget decision rather than a long-term, strategic decision that will impact their cash flow, efficiency of their daily operations, income statement, and taxable income for years to come. They need your help understanding the importance of and then making the right capital budgeting decisions.

Capital budgeting decisions relate to decisions on whether or not a client should invest in a long-term project, capital facilities and/or capital equipment/machinery. Capital budget decisions have a major effect on a firm’s operations for years to come, and the smaller a firm is, the greater the potential impact, since the investment being made could represent a substantial percent of the firm’s assets….”

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If you are building a capital budget, then click to access the Budgeting 101 Execution Plan. This execution plan includes principles, rules, and best practices for a successful budget. The SCFO Lab also includes 19+ more execution plans and so much more.

Capital Budgeting Methods

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Construction Costs Are Going Through the Roof

Sorry, I couldn’t resist the pun! Recently I have been visiting with several general contracting clients regarding the challenges they are facing. Both complained of the dramatic rise in construction costs in the face of a softening economy. Over the past 6 months construction costs have been increasing 1% – 2% per month for an annualized inflation rate of 12% to 20%.

What It Means For Construction Costs

These increases have made it difficult to manage the budgets for their projects. Projects that were awarded 6 months ago have seen dramatic price increases in almost every area. Steel prices, as we mentioned, have seen the most dramatic increase. In some projects the steel component has increase 50% over the past six months.

But that is not the only area. Equipment rental, PVC pipe (made from petrochemical feedstock), copper wiring and other basic material have all seen increases. Finally, delivery costs to get the material to the job site have followed the price of gasoline.

So how are they managing the situation? One strategy is to lock in their subs prices within seven days of being awarded the contract. One contractor notified the sub on the eighth day and received a price increase of $20,000. He later negotiated it back down to $2,000 (which he couldn’t pass on to the customer.)

Other strategies include negotiating price increases with customers or factoring in modest price increases in their original bid. Either way it will be interesting to see how rising replacement cost vs falling demand affects real estate values.

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Construction Costs

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Construction Costs

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