B2 - Planning Techniques: Forecasting and Projection

Question 1

In a decision analysis situation, what costs are generally NOT relevant to the decision?

Answer 1

Historical Cost

Question 2

When considering alternatives, such as discontinuation of a product line, what costs should management consider most?

Answer 2

Relevant Costs

Question 3

Contribution Margin Ratio

Answer 3

CM/Sales

Question 4

Break-even point (FORMULA)

Answer 4

Total Fixed Costs/Contribution Margin Ratio (OR Contribution Margin per unit)

Question 5

Margin of Safety

Answer 5

Difference between current sales and break-even sales. (Actual, or budgeted, sales less break-even sales).

Question 6

Contribution Approach (EQUATION)

Answer 6

Revenue
Less: Variable Costs (DM+DL+Var. Mfg O/H+Var. SG&A)
Contribution Margin
Less: Fixed Costs (Fixed Mfg. O/H+Fixed SG&A)
Net Income

Question 7

When do fixed costs equal contribution margin?

Answer 7

At Break-even

Question 8

For short-run profit maximization, a company should manufacture the product with:

Answer 8

The GREATER contribution margin per hour of manufacturing capacity.

Question 9

How can a company determine the total amount to be included in the calculation to determine the minimum acceptable price for a job?

Answer 9

The minimum acceptable selling price should include only the incremental costs associated with the order. (Most of the time special orders won’t affect regular sales, if there is idle capacity).

Question 10

Required Sales Volume for Target Profit (FORMULA)

Answer 10

Sales = Variable Costs + (Fixed Costs + Net income before taxes) OR Sales = (Fixed Cost + Profit (EBT))/Contribution margin ratio

Question 11

Target Sales (with Tax Considerations) FORMULA

Answer 11

EBT * (1-T) = “Target NI”

Question 12

Target Profit Before Tax (FORMULA)

Answer 12

=Target Profit After Tax/(1-tax rate)

Question 13

Relationship between absorption costing and variable costing: When production exceeds sales…

Answer 13

Inventory is higher;
under ABSORPTION costing, a portion of the fixed mfg. O/H is included with each unit in Ending Inventory.
Under variable costing, ALL fixed mfg. O/H is a period cost and expensed during the period.

Question 14

Relationship between absorption costing and variable costing: When Sales exceed production…

Answer 14

Inventory is lower;
Under absorption costing, the fixed mfg. O/H carried over from a previous period as a part of beg. inventory is charged to cost of sales.
Under variable costing, those fixed costs were charged to income in a prior period (when they were incurred).

Question 15

Determine the impact of the change in income when comparing the difference between variable costing and absorption costing

Answer 15

No change in inventory: Absorption Net Income = Variable Net income
Increase in inventory: Absorption net income > Variable Net income
Decrease in inventory: Absorption net income < Variable net income

Question 16

What is the difference between contribution approach and absorption approach?

Answer 16

The treatment of FIXED factory overhead.

In the Variable Costing Method, Fixed Factory O/H is expensed immediately (treated as a period cost).

Question 17

In regards to special orders, when a company has presumed EXCESS capacity, when should a company accept the special order?

Answer 17

Accept if Selling Price > Relevant Costs (Variable Costs) **
**Don’t forget to include any contribution margin of the alternative use of production capacity (if given).

Question 18

What kind of equation estimates the dependent variables

Answer 18

Regression Equation

Question 19

Multiple regression differs from simple regression in that it:

Answer 19

Has more independent variables.

Question 20

There are a variety of ways of classifying costs of an object as either fixed or variable. The most accurate method is considered to be:

Answer 20

The regression analysis method

Question 21

In regards to special orders, when a company is running at FULL capacity, when should a company accept the special order?

Answer 21

Accept if Selling Price > Relevant Costs (Variable Costs) + Opportunity Cost.

Question 22

The coefficient of determination, r squared, in a multiple regression equation is the:

Answer 22

Percentage of variation in the dependent variable explained by the variation in the independent variables.