Chapter 2

Question 1

For short-run maximization, what should a manufacturer pick if two separate products are sufficient to take up the whole facility?

Answer 1

To maximize profit at full capacity, contribution margin per hour should be maximized

Question 2

Define opportunity cost

Answer 2

Opportunity cost is the next best alternative. It is the cost of foregoing the next best alternative when making a decision

Question 3

What is the coefficient of determination (R squared)?

Answer 3

The coefficient of determination (R squared) is the proportion of the total variation in the dependent variable (y) explained by the independent variable (x)

Question 4

What is a regression equation?

Answer 4

It is a statistical model that estimates the dependent variables based on changed in the independent variable

Question 5

What is the Delphi method of forecasting?

Answer 5

The Delphi method involves the use of multiple teams in geographically remote locations. Information is shared and gathered in a central point and complied and then redistributed for comment. The method is highly interpersonal and requires significant judgement

Question 6

How does multiple regression differ from simple regression?

Answer 6

Multiple regression analysis is an expansion of simple regression because it allows consideration of more than one independent variable

Question 7

What is a static budget?

Answer 7

It is based on costs at one level of output. They are budgeted costs for budgeted output. They are not based on or adjusted for actual performance

Question 8

What is the purpose of creating a cash budget?

Answer 8

The main reason for preparing a cash budget is to anticipate cash flows so that excess cash can be invested and to minimize the need for interim financing

Question 9

Which budget provides information for preparation of the owner’s equity section of a budgeted balance sheet?

Answer 9

The budgeted income statement. It produces anticipated accural basis net income or loss and is added to the beginning balance of owners equity

Question 10

What information is contained in the cost of goods manufactured budget?

Answer 10

Direct materials used
Direct Labor
Overhead applied
Work In Process Inventories 
(BEG WIP + DM + DL + OH - COGM = END WIP)

Question 11

What are operating budgets and name some examples

Answer 11

Operating budgets describe the plan for revenue and expenses and the supporting schedules that go with them.
Examples: sales, material, labor, overhead, production, purchases, and the forecasting of cash that will be necessary to pay for them

Question 12

What are capital budgets and name some examples

Answer 12

Capital budgets plan for the purchase of capital assets, which only affect the operating budget through their subsequent effect on expense via depreciation

Question 13

What statistic is most useful when risk is being prioritized?

Answer 13

Expected Value. These computations assign probabilities to potential outcomes and quantify both the likelihood (percentage) and outcome (amounts) into a single value.

Question 14

Describe a controllable margin

Answer 14

A controllable margin is the contribution margin net of controllable fixed costs (which are those that managers can impact in less than one year)

Question 15

Which responsibility center acts most like an independent business?

Answer 15

The investment center. Investment centers are responsible for revenues, expenses, and invested capital

Question 16

What is probability (risk) analysis?

Answer 16

It is used to examine the possible outcomes given different alternatives. (It’s an extension of sensitivity analysis). Sensitivity analysis uses a trial and error method in which sensitivity of the solution changes in variables is calculated

Question 17

What is target costing and what is it least associated with?

Answer 17

Target costing is a technique used to establish the product cost allowed to ensure both profitability per unit and total sales volume

Question 18

What is the relevant range?

Answer 18

The relevant range is the range within which the relationship between a cost and its cost driver remain valid. Within this range fixed costs will remain fixed (won’t change) and the variable cost per unit will not change

Question 19

What is the best cost standard to measure controllable production inefficiencies?

Answer 19

The best basis for setting standards is engineering standards based on attainable performance

Question 20

The master budget and the production budget both start with what?

Answer 20

The SALES budget

Question 21

What is budgeting?

Answer 21

Budgeting is the process of creating a formal plan and translating goals into a quantitative format

Question 22

What causes the production volume variance?

Answer 22

It is the difference from the planned level of the base used for overhead allocation and the actual level achieved

Question 23

If variable OH is applied on the basis of direct labor hours, and the direct labor efficiency variance is unfavorable, what happens to the variable OH efficiency variance?

Answer 23

The variable OH efficiency variance will also be unfavorable

Question 24

What is budgetary control?

Answer 24

Budgetary control is the process of developing plans for the company’s expected operations and controlling the operations to help carry out those plans

Question 25

What is the overhead volume variance?

Answer 25

It is a function of the budgeted amount of overhead based on standard hours allowed compared with overhead applied, at a pre-determined rate, to work in process. (The production supervisor has little control over established standard and budgeted amounts)

Question 26

What is the formula for setting sales prices based on volume assumed (Sales price/unit)

Answer 26

Sales price per unit= (Fixed costs + Variable Costs + Pretax profit)/number of units sold

Question 27

What is the margin of safety formula?

Answer 27

= Total Sales (in dollars) - Breakeven Sales (in dollars)

Question 28

For a full capacity plant, in making decisions about which products to emphasize, managers should select products with…?

Answer 28

The highest contribution margin per unit of the constraining resource

Question 29

The opportunity cost of making a component part where there is no alternative use for the factory is?

Answer 29

Zero. If there is excess capacity, then it is not possible to have an opportunity cost because nothing is being foregone

Question 30

What account is most impacted by the use of the percentage of sales forecasting method for budgeting purposes?

Answer 30

Accounts Payable. If sales increased or decreased, purchases would presumablyI increase or decrease, by whatever percentage was being used in the budgeting process. If purchases increased or decreased, accounts payable would presumably increase or decrease by approximately the same percentage

Question 31

In a regression analysis, the coefficient of determination determines…

Answer 31

The goodness of fit. It measures the proportion of the total variation in the dependent variable (y) explained by the independent variable (x). The greater this proportion is, the better the “fit” of the regression equation linking the two variables

Question 32

What is the learning curve analysis?

Answer 32

It is used to determine increases in efficiency or production as experience is gained. With long production runs, learning curve analysis is the best method for estimating the cost of the bid