Chapter Review Questions:
Chapter 10 (Page 247-265)
Management Guide – section 2.23

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  1. List and briefly describe the four (4) phases of the annual financial planning process for a company.     [12-points]
    The first phase of the financial planning process is conducting a financial analysis of the business organization. It is good to consider the financial reports 3 years prior and conducting a comparative analysis of the profit and loss and balance sheet reports. The second step is assessing the organizational finance performance and comparing it against industry norms using the RMA financial statement studies. The third phase is developing a pro-forma financial forecast model and budget for the business. The final part is reviewing the financial analysis work, the financial budget with the organization business advisers to get unbiased feedback on the financial planning process at the organization.


  1. What is meant by the term “budget”? [2-points]
    A budget is a quantitative financial plan detailing the amount of money allocated for a given purpose for a defined time period. The organization budget describes the strategic financial plans of the different business units, departments and activities in measurable terms. A budget is a critical part of the financial planning process which requires the individual departments to list their expected revenues and projected expenses for the financial year. A good budget will give a close estimate of the expenditure while an inefficient budget will stay far away from the estimated figures in the budget.


  1. Briefly describe what is meant by and discuss the differences of an “operational budget” and “capital budget”. [8-points]
    An operating budget is a financial plan that is developed an year in advance of the financial year and is made up of estimated revenues and expenses for the following year. An operating budget combines known expenses which an organization generates, expected future costs and forecasted income and revenue for the next year. When developing the operating budget, the financial planners must understand historical expenses, and then factor in the market variables that may increase costs. A capital budget. The capital budget on the other hand is a long term financial plan to assist financial planners in planning for long term investments such as new machinery, new plants, products and research and development plans. The capital budget allocates business resources for long term investment to increase the business value in the long term.


  1. What is meant by “fixed costs” and provide a couple of examples? [5-points]
    Fixed cost is an organizational cost that does not change but remains stable despite increase or decrease in the amount of goods or services produced or sold by the organization. Fixed costs include rent, insurance and advertising costs which do not change with changing production volume.


  1. What is meant by “variable costs” and provide a couple of examples? [5-points]
    A variable cost is an organizational or corporate expense that changes with the level of production output or volume. Variable costs usually include direct material costs for production, packaging costs and direct labor costs which might increase with the production volume which varies with demand and market elements.


  1. What is meant by “direct operating costs” and provide a couple of examples? [5-points]
    Direct operating costs are the expenses which are related directly to the operation of the business, device, component, and equipment or organization facility. Examples of direct operating costs include office products, payroll for employees and raw materials.


  1. A company may choose to allocate costs to specific departments (chargeback) in order to cover the cost of operations. Briefly describe the four (4) allocation (chargeback) methods available to the aviation department of a company   [20-points]
    IT costs which are the most common cost that receive chargebacks in the organization and can be allocated in various methods. The first chargeback method is the no charge method, where the IT cost is considered as an integral part of the managerial cost and thus not charged to other departments. The second method is the fixed charge method where the IT cost is divided among all departments in the organization charging them a fixed monthly charge. The third charge back is the variable charge method based on resource usage including the network use by department, printer use and connection use and bandwidth. The final chargeback method is the variable charge method based on volume of user activities including transactions performed when a department prints an item.