Quantitative Analysis Part1

ACCA F5 - Performance Management 

High/low analysis:

It is analysis of highest and lowest compound values to segregate simple dependent and independent variables. It is mostly used in cost accounting to segregate variable and fixed costs from semi-variable cost by using semi-variable costs at highest and lowest activity levels. It is simple and understandable tool. However, it assumes that activity is the only factor to affect cost and it only uses two values at extreme points, which may not be realistic for activities in between these two points.

Calculation steps: (Segregating fixed and variable cost form total cost)

Ø  Select highest and lowest activity levels and costs

Ø  Find variable cost /unit = (Cost @ high activity - Cost @ low activity) / (High activity - Low activity)

Ø  Find fixed cost (using total cost equation) = Total cost @ activity level - Total variable costs

Ø  Use variable and fixed cost to forecast fixed cost for required activity level.

                                                                                                                                                         

 From article "Forecasting technical Part 1"

Regression analysis

Regression analysis is widely used for forecasting. It establishes relation between dependent variables and independent variables. E.g. Prediction of sales volume with the growth in per capita income. Decrease in price of product with increase in supply. A simple liner regression equation is presented here.

Y = a + b x            (where value of Y depends on value of X and a is a constant)

For forecasting past data values for X and Y are used to calculate the value of "a" and "b".

For "n" sample size, b=(n∑xy-∑x∑y)/(n∑x²-(∑x)²) and  a=(∑y/n)-(b∑x/n)               

Once values of "a", "b" and "x" are established, then past trend is projected to forecast for upcoming intervals/periods.

A multiple linear regression equation looks like Y = a + b₁ X₁ + b₂  X₂ +…… + b_n X_n

This technique is mostly suitable for forecasting to businesses in stable and slowly changing sector and market. The forecast can be unrealistic if used to rapidly changing, dynamic, turbulent, and innovative business sectors.

Installation of analysis tool pack is essential for using Excel 2007 to calculate regression.

Ø  Office button > Excel option > Add-Ins > Excel Add-Ins > Go > Check - "Analysis Toolpack"

Then copy input variables to excel sheet, go to Data Ribbon  > Analysis > Data Analysis > select Regression and fill in the inputs required.