Cost and Case Study

Topics: Cost, Capital expenditure, Forecasting Pages: 7 (1337 words) Published: October 9, 2012
AEREN FOUNDATION’S Maharashtra Govt. Reg. No.: F-11724




MBA 3rd Semester




Traditional Forecasting
Many organizations seek to mitigate some of the traditional budgeting problems noted above by implementing some form of forecasting. This allows managers to update budgeted numbers with actual results for the periods that have already occurred. The forecasts are used to predict what will happen in the future, often seeking to confirm whether predetermined annual targets will still be met.

While financial managers think of forecasting in terms of periodic forecasts, operating managers are constantly adjusting plans, including sales estimates, which are converted to operating plans for production and inventory control levels. Most of these planning efforts are conducted in numerous discrete systems supporting different functional areas. A great deal of effort is required to integrate and reconcile these different views of the future.

Financial forecasts are performed on a preset schedule, typically quarterly or monthly.

According to David Axson, author of "Best Practices in Planning and Management Reporting" 4. Axson explains that these process cycle times are extended due to:

* The difficulty in getting timely information;
* The high level of details required taking significant time to forecast each item; and * The fact that much of this data is developed in a series of disconnected spreadsheets making integration a time-consuming process.

Many companies use a purely financial process that is disconnected from its specific business drivers-a mere financial accumulation of trends. These companies often determine their monthly forecasts by subtracting the actual results to date from their annual targets and then dividing the remaining gap by the months remaining. They then view the monthly result to see if it is even possible to attain, All their forecasting work focuses on achieving the predefined annual targets, even if the underlying assumptions that went into creating those targets are now Incorrect.

The level of detail used often mirrors the annual plan. Some planners forecast at the same level of detail that is used for actual reporting, This can result in tremendous efforts in calculating variances and the related explanation process.

These misconceptions often turn traditional forecasting into merely a different pc version of the problems with traditional budgeting. Let's examine why.

For many organizations, forecasting is a mechanical process that adjusts future run rates upward or downward as necessary so that the predetermined annual targets are still met.

They ignore the fact that targets were set based on various assumptions. What happens when the annual targets are held but their underlying basis proves incorrect? The great quality guru W. Edwards Deming noted that "if you pay people to hit targets, they often will, even if it destroys your company."

Q1) Explain the process of cycle times given by David Axson. (20 Marks)


Methodology :
Jimmy Carter, who introduced ZBB for resources allocation and control in government explains, "In ZBB, the budget is broken into units called DPs which are prepared by managers at each level. These packages include an analysis of purpose, cost, measures of performance and benefits, alternative courses of action and consequences of not performing the activity. Then all packages are to be ranked in order of priority. After several discussions between department heads and the chief executive, the rankings are finalized, and packages upto the level of affordability are approved and funded."

In more specific terms the ZBB methodology as well as the...
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