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Financial Modelling And Forecasting August 2011 Question Paper
Financial Modelling And Forecasting August 2011
Course:Bachelor Of Commerce
Institution: Kenyatta University question papers
Exam Year:2011
EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
FINANCIAL MODELLING AND FORECASTING
DATE: AUGUST 2011 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
Question One
a)Explain the following as used in modeling: (9 Marks)
i) Normative models
ii) Controllable variables
iii)Intermediate variables
b)With aid of a diagram, outline the various phases of modeling process (12 Marks)
c) Why is a scstter diagrm vital in modeling and forecasting (3 Marks)
d)Give six benefits of budgeting (6 Marks)
Question Two
In June 2010, the managing Director of a large furniture store, Cushair Design, engaged a management
consultant to device simple practical method of forecasting the store’s quarterly sales levels for a
period of six months ahead. The consultant felt that a forecasting method appropriate for the purpose
would first require him to deseasonalise the store’s gross quarterly sales over the last 30 months. The
time series obtained could then be plotted, a line of best fit determined and extrapolated over the next
two quarters.
2
Gross sales data for Cushair Designs
Sales period Value of retail sales (£’000’
Jan – Mar 2008 285
Apr – June 2008 310
Jul – Sep 2008 315
Oct – Dec 2008 385
Jan – Mar 2009 340
Apr – Jun 2009 370
Jul – Sep 2009 375
Oct – Dec 2009 460
Jan – Mar 2010 395
Apr – Jun 2010 425
The management consultant also gave some thought on how he could avoid getting the store to
compute its own seasonal indices, an operation he felt in-appropriate considering the small amount of
past data he had available. He decided to use a national quarterly seasonal index as published in a
national journal. He thought what this client’s furniture store had a product mix not too different from
the aggregate mix on which the index was based.
National quarterly seasonal index for furniture
Multiplicative Jan –March April – Jun July – Sep Oct – Dec
Seasonal index 94 98 106 112
Required:
a) Plot the actual quarterly sales figures on graph paper and explain why the multiplicative model
would be more appropriate for these data than the addictive model (6 Marks)
b) Calculate the values of the deseasonalised data and plot these data or your graph (8 Marks)
c) Estimate the gross sales figures for quarter three in 2010 by extrapolation of the deseasonalised data
line graph (6 Marks)
Question Three
A tax consultant hypothesis is that income tax evaded (Y) depended on the true income (X1) and
marginal tax rate (X2). The following data was provided relating to past 6 years.
3
Tax evaded income tax rate
Sh million sh million %
20 100 20
24 120 24
25 120 24
28 132 25
30 128 25
32 135 25
a) Assuming that the relationship is linear, determine the line of best fit (12 Marks)
b) Forecast the tax evaded when true income is sh 140m and the tax rate being 30% (4 Marks)
c) What tax rate for an income of sh 138m yield tax evasion of sh 36m (4 Marks)
Question Four
Maisha Meta Products Ltd. has prepared a schedule of the estimated overhead costs for the coming
year. The schedule was prepared on the assumption that production would amount to 800,000 units.
Costs have been classified as either fixed or variable according to the judgment of the financial
controller. The following overhead cost items and their classification as either fixed or variable form
the basis for the overhead cost schedule.
Item Total cost
Sh.’000’
Indirect materials (variable)
Indirect labour (Sh.171,000 fixed)
Rent (fixed)
Electricity (variable)
Equipment depreciation (fixed)
Equipment maintenance (Sh.8,500 fixed)
Personal property taxes (Sh.8,350 fixed)
Data processing (Sh.9,470 fixed)
Technical support (fixed)
37,500
194,200
236,420
27,210
181,000
24,330
14,100
11,220
16,940
742,920
Required:
a) Using the account analysis method, construct an assumed linear forecasting model to relate the
4
total cost structure (12 Marks)
b)Estimate the total cost of producing 900000 units (4 Marks)
c)What production level would incur a total cost of sh 400m (4 Marks)
Question Five
Kangunu Limited which manufactures two products X and Y. The cost accountant provided the
following information relating to the two products as follows
Product quantity unit price
(Units (sh)
Sales X 1000 100
Y 2000 120
Materials used in company’s products
Material A B
Unit cost Sh 4 Sh 6
Quantities used in: A B
(units) (units)
Product X 4 2
Product Y 3 3
Finished stocks: Product X Product Y
(units) (units)
Quantities
1st April 1000 1500
30th April 1100 1650
Material stocks: A B
(units) (units)
1st April 26000 20000
30th April 31200 24000
Required:
For the month of April, prepare: (20 Marks)
a) Sales in quantity and value budget. (5 Marks)
b) Production quantities budget (5 Marks)
c) Material usage in quantities budget (5 Marks)
d) Material purchases in quantity and value budget. (5 Marks)
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