ch 4, Module 1

Question 1

sensitivity analysis

Answer 1

the process of experimenting with different parameters and assumptions regarding a model and cataloging the range of results

risk management tool

helps mgt understand which variables are the most sensitive to change

Question 2

scenario analysis

Answer 2

managers may prepare multiple different scenarios which represent alternative possible outcomes

probabilities may be assigned to each scenario

Question 3

forecasting

Answer 3

driven by historical data and actual expectations

broken out into qualitative and quantitative methods

Question 4

simple regression analysis formula

Answer 4

y = a + Bx
where a = FC
and B = VC

Question 5

simple regression analysis

Answer 5

simple regression involves only one independent variable. M

Question 6

multiple regression

Answer 6

involves more than one independent variable

Question 7

What does the coefficient of correlation tell you?

Answer 7

r

measures the strength of the linear relationship between the x variable and y variable

+1 –> if there is a change in x there is always a change in y (positive correlation)

-1 –> if there is a change in x there is always a change in y in the opposite direction (negative correlation)

0 –> no correlation

Question 8

What is the coefficient of determination?

Answer 8

r squared

the proportion of the total variation in the dependent variable (y) explained by the independent variable (x). It’s value lies between 0 and 1

the higher the r squared, the greater the proportion of the total variation in y that is explained by the variation in x. That is ,the higher the r squared, the better the fit of the regression line.

Ex: an r2 of .81 means that 81% of the change in total cost during a period can be attributed to changes in volume

Question 9

high-low method

Answer 9

simple technique that is used to estimate the fixed and variable portions of cost

1. gather data - compare the high and low volumes and costs (igonoring any obvious aberrations)
2. analyze data

Question 10

flexible budget

Answer 10

the result of the high low method

a series of budgets that are prepared for a range of activity levels rather than a single activity ( in which variable costs are adjusted to thelevel of activity and FCs are held constant.

Question 11

learning curve

Answer 11

based on the premise that as workers become more familiar with a specific task, the per-unit labor hours will decline as experience is gained and production becomes more efficient

the activity itself must be repetitive in nature, involve intense labor, and have little to no labor force turnover or breaks in production

variable costs per unit should decline until a steady-state period is achieved.

*as cumulative production doubles, cumulative average time per unit falls to a fixed percentage of the previous average time.