This document will give you the understanding of the percentage of annual average method in measuring seasonal variations of business maths.

PROCEDURE

The first step is to eliminate the effect of the trend. To this end, compute the simple averages for each year and divide each of the given monthly or quarterly observations by the corresponding annual- average, expressing the result as a percentage.

The next step is to average the percentages with a view to removing the cyclical and irregular variations and computing the seasonal indices. For this purpose, sort out these percentages by months or quarters and find the monthly or quarterly average percentages using either the mean or the median. In case of mean, discard the extreme percentages under each month or quarter. If the 12 monthly or the 4 quarterly average percentages do not average 100 adjust them by multiplying each of them by a suitable factor that will make the average of all the percentages equal 100. The resulting 12 or 4 percentages are the required indices.

• The Ratio To Trend Method

In this method, the trend values are obtained for each time period by fitting a least-squares trend line either to the observed time series data or the annual averages. The rest of the computational procedure is the same as that of the ratio-to-moving average method. But this method is inferior to the ratio-to-moving average method as the seasonal index computed by it includes cyclical and irregular variations.

Short but Comprehensive introduction to Link Relatives Method in Measuring Seasonal Variation for Business Maths.

DEFINITION

A method for computing indexes by dividing the value of a magnitude in one period by the value in the previous period. In relative link method of seasonal variations, link relatives are calculated for all the values of the data.

PROCEDURE

Link relatives = value of a year/ value of previous quarter or month * 100

Then we calculate the sum of link relatives for each quarter or month. Average of these totals is calculated by dividing the totals by the total number of years in a quarter or month. Chain indices are calculated from these averages. Chain indices = average link relative of the year * chain index of previous year / 100. For first month or quarter, two chain indices are calculated. Adjustment factor is calculated by taking difference of two chain indices of first month or quarter and dividing it by number of months or number of quarters. The seasonal indices are calculated by subtracting adjustment factor from second quarter or month, twice of adjustment factor from third quarter or month and so on. The seasonal index for first quarter or month remains hundred.

STEPS

• Compute the link relatives by expressing each monthly or quarterly value as a percentage of the proceeding monthly or quarterly value
• Arrange the link relatives by months or quarter and find an appropriate average of these relatives for each month or quarter usually median is used
• Convert the average (median or mean) relatives into a series of chain relatives by setting the value of January or the first quarter as 100, and caring the process to include the first unit of the next period.
• A discrepancy due to trend increment (positive or negative) exists between the chain relative for the first January or quarter and that for the next prod. Adjust the chain relatives for the trend component by subtracting one-twelfth of the discrepancy from the value of February, two-twelfth from the value of march and so on or by subtracting one-fourth of the discrepancy from the relative of seco9nd quarter, two-fourth from the third quarter relative and three-fourth from fourth quarter relative.
• To obtain seasonal indices reduce the, adjusted chain relative to the same level as January or the first quarter by multiplying each of the adjusted chain relatives by the correction factor that will make the average of the all indices equal100. These final figures are the desired indices of seasonal variation.

There are six steps required to compute the seasonal index as mentioned below:

• Calculate the four quarter moving total
• Compute the four quarter moving average
• Center the four quarter moving average
• Calculate the percentage of actual value to moving average value
• Calculate the modified mean for each quarter
• Adjust the modified mean

Calculate The Four Quarter Moving Total

Find the centered 12 monthly (or 4 quarterly) moving averages of the original data values in the series. A moving total is associated with the middle data point in the set of values from which it was calculated. Because the first quarter was calculated

• Compute The Four Quarter Moving Average

Express each original data value of the time-series as a percentage of the corresponding centered moving average values obtained in step(1).

• Center The Four Quarter Moving Average

Arrange these percentages according to months or quarter of given years. Find the averages over all months or quarters of the given years

There are yet many factors that result in Seasonal Variations, for your assistance in MBA Finance Assignment, we brought some facts and figures.

The main factors that can cause the seasonal variation are as follow:

• Climate and weather conditions
• Custom, traditions and habits

FEATURES OF SEASONAL VARIATIONS

The seasonal variation has the following characteristics by which we can estimate the quality of a seasonal variation:

• Regularity
• Easy forecasts
• Increase or decrease
• Fixed proportion

OBJECTIVE TO MEASURE SEASONAL VARIATION

The seasonal variation is to be measure by keeping in view the following objectives:

• Analysis of past behavior of the series
• Forecasting the short time fluctuation
• Elimination of seasonal variation to measure cyclical variation

EXAMPLE O SEASONAL VARIATION IN BUSINESS

• Crops are sown and harvested at certain time every year and the demand for labor growing up during the sowing and harvesting season
• Demand for woolen clothes goes up in winter.
• Price increase during festivals
• With drawl from banks are heavy during first week of month.

METHODS TO MEASURE SEASONAL VARIATION

Seasonal variation is measured in terms of an index, called a seasonal index. It is an average that can be used to compare an actual observation relative to what it would be if there where no seasonal variation. An index value is attached to each period of the time series within a year. This implies that if monthly data are considered there are 12 separate seasonal indices, one for each month. There can also be a further 4 index values for quarterly data. The following methods use seasonal indices to measure seasonal variations of a time-series data.

• Ratio-to-moving average method
• Link relatives’ method
• percentage of annual average method
• Ratio to trend method

RATIO-TO-MOVING AVERAGE METHOD

This technique provides an index to measure the degree of the Seasonal Variation in a time series. The index is based on a mean of 100, with the degree of seasonality measured by variations away from the base.

EXAMPLE

For example if we observe the hotel rentals in a winter resort, we find that the winter quarter index is 124. The value 124 indicates that 124 percent of the average quarterly rental occurs in winter. If the hotel management records 1436 rentals for the whole of last year, then the average quarterly rental would be 359 (1436/4). As the winter-quarter index is 124, we estimate the no. of winter rentals as follows:

359*(124/100) =445;

Here, 359 is the average quarterly rental. 124 is the winter-quarter index. 445 the seasonalized spring-quarter rental.

This is method is also called the percentage moving average method. In this method, the original data values in the time-series are expressed as percentages of moving averages.

This document will let you know about what is a trend and how to measure trend in business maths that is pertaining to your studies over MBA Finance and Banking.

Trend

Trend can be defined as the general tendency of data to grow or decline over a long period of time.

PURPOSE OF MEASURING TREND

There are following purposes of measuring trends:

• Knowledge of past behavior
• Estimations
• Study of other components

HOW TO MEASURE TREND

Start with the broader picture to put trends into perspective. At the moment we discern general and clear global movements such as: the importance and integration of personal and environmental wellness, the demand for transparency and integrity, the longing for authenticity and clarity. These macro developments produce industry trends for instance: the marketing of products and services such as wellness themes in traveling, events and luxury goods. The popularity of branding our business refers to the development of presenting a clear and consistent image, to stand out from the rest.

Stay aware of the counter trends. While some organizations focus on one service or product only, other companies offer a one-stop-shop service. Although we are eager to present our uniqueness, at the same time we do not want to be an island and we become members of associations, alliances and organizations that share our vision. Each choice creates its opposite.

Knowing the macro developments and the duality of our decisions, we have a touchstone to measure trends that you spot in your company, branch or industry.

After you have turned your focus outward to the major existing trends, it is time to look within. How do we want to act upon the ideas we encounter? The following steps provide a process to make a decision about a trend:

To create more success, we should have a clear picture of our surroundings and of ourselves. With a pure external focus, we will lose sight of our inner wisdom and purpose. Measuring trends is measuring us.

As in chess, it is not only the position of the pieces of your opponent that will influence your moves; it is thinking ahead how your own actions will affect the outcome of the game.

• Introduction

Seasonal variation is a component of a time series which is defined as the repetitive and predictable movement around the trend line in one year or less. It is detected by measuring the quantity of interest for small time intervals, such as days, weeks, months or quarters.

• Definition

By the definition seasonal variations are the changes in inventory levels, profits, sales volume, and so on  caused by seasonality of the business.

TIME SERIES

By the definition a time series s is a set of observations recorded according to some period of time. The observations are usually recorded at equal intervals of time to estimate the future values of time series and to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    cope with uncertainty about future.

TREND

• Definition

The general direction of the price of an asset or market. Trends can be thought of in varying lengths including short, intermediate and long term. If one can identify a trend, it can be highly profitable as you will be able to trade with the trend.

TREND LINE

By the definition a trend is a line on the price or value chart of a security depicting the general direction in which the security is headed. This chart shows an example of an upward trend line.

REASONS FOR STUDYING SEASONAL VARIATION

• It gives way to compare two time intervals
• It predicts the short range patterns such as the demand for cold drinks in the summer
• The description of the seasonal effect provides a better understanding of the impact this component has upon a particular series.
• After establishing the seasonal pattern, methods can be implemented to eliminate it from the time-series to study the effect of other components such as cyclical and irregular variations. This elimination of the seasonal effect is referred to as depersonalizing or seasonal adjustment of data.

These are following advantages of periodic budget applications in a manufacturing company:

• Periodic budget clarifying the business planning.
• Establishing coordination between functions of different departments.
• Measuring and controlling the work efficiency.
• It helps to manage the business finance.
• Informing about the business plans to the related parties.
• Normally there are following objectives of Budgeting:

RECOMMENDATIONS

In view the study I’d like to recommend that:

• The company should factor in some slack and make sure that you have more than enough money socked away or coming in before expanding the business or taking on new employees.
• While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.
• Don’t be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews

CONCLUSION

Periodic budgeting is the powerful tool to control company expenses and to achieve the expected revenues. There should be strong coordination among each department and among each element of periodic budget to achieve the desires results and to maximize the company’s profitability.

This document will get you understanding of best qualities of good budget within in an organization.

Department managers in a business make decisions every day that affect the profitability of the business. In order to make effective decisions and coordinate the decisions and actions of the various departments, a business needs to have a plan for its operations. Planning the financial operations of a business is called budgeting.

• Responsibility

To prepare the budget one should be the responsible an dwell defined authority.

• Comprehensiveness

Budget should show the entire financial position of the organization in board details.

• Flexibility

A good budget should have certain flexibility so its implementations can be made easy.

• Reliability

The information of budget which estimates should be reliable as much as possible.

• Integrity

A good budget should involve the assurance that the fiscal program as enacted and as intended. Budget is plan prepared for individual capital expenditure projects.

• Coordination

Different units in the company must also coordinate the many different tasks they perform

• Control

Once a budget is finalized, it is the plan for the operations of the organization. Managers have authority to spend within the budget and responsibility to achieve revenues specified within the budget.

Here is a report that will assist MBA students in their assignments of how to prepare loss and profit report for a manufacturing firm.

For the Six month’s period ended December 31, 2009

This balance sheet is a specimen for MBA students to get training and understanding of how to prepare balance sheets for any manufacturing company.

as at December 31, 2009

For the Six month’s period ended ended December 31, 2009

A dummy budget report of PEL for MBA students to get an understanding of how budgeting is generally done at any manufacturing company We tried to cover the types of budget plans not exactly for the said company.

There are following types of budget applications are practiced at Pak Elektron Limited:

• An operating budget
• A capital expenditures budget
• A cash flow budget

OPERATING BUDGET

An operating budget for a specific period is the detailed projection of all estimated income and expenses during a given future period. At Pak electron limited the operating budget covers, records Sales, Production costs, & other related activities. The operating budget must be reviewed, discussed, and coordinated by a press’s director, financial manager, and department managers. The director’s involvement in the budgeting process is extremely important. The director should provide subordinates with initial guidelines, review all proposals as originally submitted, request revisions, resolve differences between subordinate managers, and ensure balance and consistency in the final budget. Budgeting should be essentially a line function carried out by line managers. The financial manager and staff should provide information and other technical support, but budget negotiation and decision making should involve only those managers who are in some way responsible for a particular function.

A CAPITAL EXPENDITURES BUDGET

Capital Expenditures is referred as amount of money needed to spend on capital items or  fixed assets such as land, buildings, roads, equipment, etc. that are projected to generate income in the future. Capital expenditures to be budgeted include replacement, or construction of plants and major equipment. Plan prepared for individual capital expenditure projects. The time span of this budget depends upon the project. Capital expenditures to be budgeted include replacement, acquisition, or construction of plants and major equipment.

In the year under review gross turnover reached at Rs. 6,077 million, which is higher by Rs. 2,094 over the last year showing an increase of 53%. The net profit reflects an increase of Rs. 136 million (96%) on the comparative financial results.

A CASH FLOW BUDGET

A cash flow budget is that which provides an overview of cash inflows and outflows during a specified period of time. This is often called the cash flow, or the cash flow budget.

A cash flow budget is a useful management tool because it:

• Forces you to think through your production and marketing plans for the year.
• Projects your need for operating credit and your ability to repay borrowed funds.
• Projects when you must borrow money and when you can repay it
• Helps you control your finances. By comparing your budget to actual
• Cash flow, you can spot developing problems because of an unexpected
• Drop in income or unplanned expenses, and spot opportunities
• To save or invest funds if net cash flow is higher than expected.
• Helps you communicate your farming plans and credit needs to your

CASH FLOW BUDGET STATEMENT

• If your total projected net cash flow for the year is negative, there are a number of annual adjustments you can make.
• Sell more current assets (crops and livestock). Be careful here, though. Reducing inventories may solve the cash flow squeeze this year, but result in even more severe problems next year.
• Finance capital expenditures with credit, or postpone them until another year.
• Try to reduce the size of intermediate and long-term debt payments by lengthening the repayment period or adding a balloon payment at the end.
• Convert carry-over short-term debt to intermediate or long-term debt by refinancing.
• Reduce non-farm expenditures, or increase non-farm income. Sell intermediate or long-term assets.
• Even when your yearly net cash flow is positive

Some farm business managers operate with a line of credit from their lender, with a maximum borrowing limit, instead of borrowing funds in fixed amounts.

These are following objectives of Budget to plan and develop a periodic budget in a manufacturing company:

• To estimate of future revenues & costs
• Allocate resources in a manner consistent with the vision, goals, strategies, and priority projects outlined in the 2009 Strategic Plan.
• Ensure current Public Safety service levels and fund highest priority enhancements to the extent practicable.
• Support programs and policies consistent with the priority project to develop a long-term fiscal sustainability plan.
• Support Economic Development initiatives approved in the 2008 Budget by City Council.
• Seek alternatives to finance Transit Services in order to maintain the current or near current level of service.
• Identify potential cost recovery opportunities from non-general fund organizations and programs.
• The cost allocation model allocating City core service expenditures will determine the revenue estimates.
• Create a structurally balanced organization that maximizes service efficiency and is positioned to adapt as the city continues to grow.

IMPORTANCE OF PERIODIC BUDGETING

Budgets and forecasts provide a feasibility analysis. They can help develop a business model, review your key assumptions, and identify resource and capital needs. Budgets and forecasts can be used to find funding. They demonstrate the potential of your business to investors and lenders. Budgets and forecasts can also be used as a management tool. They can help you establish milestones and require accountability for accomplishing the milestones. They can help identify risks and show benchmarks. This will help the small business owner make the necessary adjustments to avoid the risks, to reach the milestones, and to measure up to benchmarks.

BUDGETING SECTION

Starting with Budgeting Department that forecasts Annual Sales, Expenditures and Costs for the company after getting production estimates and Sales plans from the marketing and than tell the amount to be arranged for production in order to finance either power division’s production or Appliances division’s production

Elements of Periodic Budget

A complete periodic budget generally consists of following important elements:

• Sales budget
• Production budget
• Manufacturing budget
• Budgeting commercial expense
• Budgeted income statement
• Budgeted balance sheet

• Sales Budget

A sales budget is a valuable tool that gives a direction to a company with regard to its targeted sales. This is the most important element of the periodic budget that based on realist sales estimates based on analysis of the past sales. It helps to improve the profitability of a company. The company makes a financial plan with regard to the amount of goods and services that it plans to sell in a year and the price at which the goods and services are to be sold. This plan is its sales budget.

• Production Budget

Production budget refers to detailed plan showing the number of units that must be produced during a period in order to meet both sales and inventory needs. Production requirements for a period are influenced by the desired level of ending inventory. Inventories should be carefully planned. Excessive inventories tie up funds and create storage problems. Insufficient inventories can lead to lost sales or crash production efforts in the following period.

• Manufacturing budget

Manufacturing budgets are prepared for direct material, direct labor and factory overhead budget to identify these costs with product.

Direct Material

Schedule showing how much material will be required for production and how much material must be bought to meet this production requirement. The purchase depends on both expected usage of materials and inventory levels.

Direct Labor

A schedule for expected labor cost. Expected labor cost is dependent upon expected production volume (production budget). Labor requirements are based on production volume multiplied by direct labor-hours per unit. Direct labor-hours needed for production are then multiplied by direct labor cost per hour to derive budgeted direct labor costs.

Factory Overhead Budget

Schedule of all expected manufacturing costs except for direct material and direct labor. Factory overhead items include indirect material, indirect labor, factory rent, and factory insurance. Factory overhead may be variable, fixed, or a combination of both.

• Budgeting Commercial Expense

The company’s chart of accounts is the basis for budgetary control of the commercial expenses which includes both the marketing and administrative expenses.

Marketing Expense Budget

Marketing expense budget is the estimation of cost to be included in the marketing. Marketing expenses are fall under two categories:

• Obtain the order which involves selling and promotion
• Filling the order which involves warehousing, packing, shipping, credit and collection and general accounting of marketing activities.

Administrative Expenses

It includes the cost that is unique to administration such as directors’ fee, franchise taxes, capital stock and professional services.

• Budgeted Income Statement

Budgeted income statement refers to summary of various component projections of revenues and expenses for the budget period. It indicates the expected net income for the period. Moreover budgeted income statement :

• illustrates a company’s projected sales, costs, expenses and net income
• based on: Sales, Purchases, Selling Expenses and Administrative Expense Budgets
• used to project net income or loss
• able to project federal income tax
• Budgeted Balance Sheet

Budgeted balance sheet refers to schedule for expected assets, liabilities, and stockholders’ equity. It projects a company’s financial position as of the end of the budgeting year.

• the final step in preparing the master budget
• summarizes the company’s financial position
• predicts amounts of the company’s assets, liabilities and equity at the end of the budget period

The application or implementation of periodic budgets must incorporate the following principles:

• Adequate guidance and prompt communication among all management level to develop and implement budget consistent with over all goals and objectives.
• Encourage participation from each management level to reduce anxiety and accomplish budget objectives
• Preparation of budget should be structured to attain the objective successfully.
• Numerous set of assumption should be evaluated in developing budget.
• Overall Spending Should Be Capped at a Set Level
• The Annual Budget Should Present a Full Picture of Future Obligations
• The department managers Should Be Involved throughout the Budget Process
• Budget Decisions Should Include Strong Enforcement

Budget restraints without strong enforcement are paper tigers. Restraints are intended to force Congress to make some uncomfortable trade-offs in order to preserve the nation’s long-term economic health. However, Members of Congress typically take the easy path of seeking loopholes that bypass restraints, thus avoiding difficult choices. Consequently, rules are only strong as their weakest link.