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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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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.

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cost accounting, cost accounting techniques, cost accounting definition

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cost accounting, cost accounting techniques, cost accounting definition

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