Planning Techniques: Forecasting & Projection

Question 1

The relevance of a particular cost to a decision is determined by:

a. Potential effect on the decision.
b. Riskiness of the decision.
c. Number of decision variables.
d. Accuracy of the cost.

Answer 1

Choice “a” is correct. The relevance of a particular cost to a decision is determined by potential effect on the decision. Relevant costs are expected future costs that vary with the action taken. All other costs are assumed to be constant and thus have no effect on the decision.

Question 2

In a decision analysis situation, which one of the following costs is generally not relevant to the decision?

a. Opportunity cost.
b. Incremental cost.
c. Avoidable cost.
d. Historical cost.

Answer 2

Choice “d” is correct. Historical cost is generally not relevant in a decision analysis situation.

Question 3

Comel, Inc. has two major product lines: stoves and dryers. Comel’s management wants to evaluate whether discontinuing dryers will increase profits. Which of the following is best for evaluating the discontinuance of the dryer product line?

a. Relevant cost.
b. Variable cost.
c. Absorption cost.
d. Throughput cost.

Answer 3

Choice “a” is correct. When considering alternatives, such as discontinuation of a product line, management should consider relevant costs. Relevant costs are those costs that will change under different alternatives.

Question 4

Jago Co. has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the:

a. Lower total manufacturing costs for the manufacturing capacity.
b. Lower total variable manufacturing costs for the manufacturing capacity.
c. Greater contribution margin per hour of manufacturing capacity.
d. Greater gross profit per hour of manufacturing capacity.

Answer 4

Choice “c” is correct. To maximize profit at full capacity, contribution margin per hour should be maximized.

Question 5

In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would:

a. Be used in the computation of the contribution margin.
b. Not be used.
c. Be treated the same as variable selling and administrative expenses.
d. Be used in the computation of operating income but not in the computation of the contribution margin.

Answer 5

Choice “d” is correct. Contribution margin is defined as net sales revenue less variable costs. Operating income equals contribution margin less fixed costs.

Question 6

Thompson Company is in the process of preparing its budget for the next fiscal year. The company has had problems controlling costs in prior years and has decided to adopt a flexible budgeting system this year. Many of its costs contain both fixed and variable cost components. A method that can be used to separate costs into fixed and variable components is:

a. Dynamic programming.
b. Monte Carlo simulation.
c. Trend analysis.
d. Regression analysis.

Answer 6

Choice “d” is correct. Regression analysis can be used to separate costs into fixed and variable components by means of least squares. This method mathematically fits a trend line to minimize the distance between the trend line and the actual observations.

Question 7

A regression equation:

a. Ignores the coefficient of determination.
b. Is based on objective and constraint functions.
c. Estimates the dependent variables.
d. Estimates the independent variable.

Answer 7

Choice “c” is correct. A regression equation is a statistical model that estimates the dependent variables based on changes in the independent variable.

Question 8

Seacraft Inc. received a request for a competitive bid for the sale of one of its unique boating products with a desired modification. Seacraft is now in the process of manufacturing this product but with a slightly different modification for another customer. These unique products are labor intensive and both will have long production runs. Which one of the following methods should Seacraft use to estimate the cost of the new competitive bid?

a. Expected value analysis.
b. Continuous probability simulation.
c. Learning curve analysis.
d. Regression analysis.

Answer 8

Choice “c” is correct. Learning curve analysis is used to determine increases in efficiency or production as experience is gained. Both products have long production runs, making learning curve analysis the best method for estimating the cost of the competitive bid.

Question 9

A management accountant performs a linear regression of maintenance cost vs. production using a computer spreadsheet. The regression output shows an “intercept” value of $322,897. How should the accountant interpret this information?

a. The residual error of the regression is $322,897.
b. Maintenance cost has an average value of $322,897.
c. Y has a value of $322,897 when X equals zero.
d. X has a value of $322,897 when Y equals zero.

Answer 9

Choice “c” is correct. The intercept value is the point at which the behavior of the independent variable (production) stated in terms of the dependent variable (cost) intercepts the y axis.

Question 10

Multiple regression differs from simple regression in that it:

a. Allows the computation of the coefficient of determination.
b. Provides an estimated constant term.
c. Has more independent variables.
d. Has more dependent variables.

Answer 10

Choice “c” is correct. Multiple regression analysis is an expansion of simple regression because it allows consideration of more than one independent variable. The other elements are consistent in simple and multiple regression analysis.

Question 11

Which of the following costs are not included in inventoriable costs under a variable (or direct) costing system?

a. Direct material.
b. Variable overhead.
c. Fixed overhead.
d. Direct labor.

Answer 11

Choice “c” is correct. Variable (or direct) costing systems capitalize as a part of product or inventoriable cost only variable cost. On the CPA exam, direct material and direct labor are presumed to be variable unless otherwise stated.

Question 12

Which of the following costs are included in product or inventoriable costs in an absorption costing system?

a. Direct material, direct labor and all overhead.
b. Direct material, direct labor, all overhead, and selling expenses.
c. Direct material, direct labor, all overhead, and all period expenses.
d. Direct material, direct labor and variable overhead.

Answer 12

Choice “a” is correct. In an absorption costing system, all product costs and no period expenses are put into product cost.

Question 13

The method of inventory costing in which direct manufacturing costs and manufacturing overhead costs, both variable and fixed, are considered as inventoriable costs is best described as:

a. Absorption costing.
b. Variable costing.
c. Conversion costing.
d. Direct costing.

Answer 13

Choice “a” is correct. Absorption costing (required for external reporting) charges direct material, direct labor, variable overhead and fixed overhead as inventoriable costs.

Question 14

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:

a. The regression analysis method.
b. The account analysis method.
c. The high-low method.
d. The engineering method.

Answer 14

Choice “a” is correct. Regression analysis is a statistical method that fits a line to the data by the method of least squares. It is the most accurate way to classify costs of an object as either fixed or variable.

Question 15

Many firms have made significant strides in reducing their inventories. Which of the following would be least likely to encourage managers to reduce inventory?

a. Using variable costing.
b. Instituting a charge against the budget for managers based on the size of the inventory.
c. Using throughput costing.
d. Using absorption costing.

Answer 15

Choice “d” is correct. Absorption costing (as the name implies) absorbs fixed overhead cost into the units produced. Those units placed in inventory can absorb some of the manager’s cost and raise profits. This method encourages larger inventories.

Question 16

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

a. The total variable cost of the component.
b. Zero.
c. The fixed manufacturing cost of the component.
d. The total manufacturing cost of the component.

Answer 16

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

Question 17

Assumptions underlying cost-volume-profit analysis include all of the following, except:

a. All costs can be divided into fixed and variable elements.
b. Total costs are directly proportional to volume over the relevant range.
c. Selling prices are to be unchanged.
d. Volume is the only relevant factor affecting cost.

Answer 17

Choice “b” is correct. Only total variable costs are directly proportional to volume over the relevant range.

Question 18

Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company’s most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm’s overall breakeven point for the upcoming accounting period?

a. The installation of new computer-controlled machinery and subsequent layoff of assembly-line workers.
b. An increase in anticipated sales of petrol relative to sales of septine and tridol.
c. An increase in the overall market for septine.
d. An increase in petrol’s raw material cost.

Answer 18

Choice “b” is correct. An increase in anticipated sales of petrol relative to sales of septine and tridol will decrease the breakeven point. This is because the product mix has changed in favor of the more profitable (higher contribution margin) products. The composite contribution margin is higher, and the breakeven point is lower.

Question 19

When a multi-product plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the:

a. Highest sales price per unit.
b. Lowest variable cost per unit.
c. Highest individual unit contribution margin.
d. Highest contribution margin per unit of the constraining resource.

Answer 19

Choice “d” is correct. In making decisions about which products to emphasize, managers should select products with the highest contribution margin per unit of the constraining resource.

Question 20

In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold in order to maximize profits?

a. The company president’s salary.
b. Purchase costs of the materials required for the joint product.
c. Separable costs after the split-off point.
d. Joint costs to the split-off point.

Answer 20

Choice “c” is correct. Costs subsequent to split-off, and revenues, are relevant to maximizing profits.

Question 21

Which of the following forecasting methods relies mostly on judgment?

a. Time-series models.
b. Delphi.
c. Regression.
d. Econometric models.

Answer 21

Choice “b” is correct. The Delphi method of forecasting involves the use of multiple teams in geographically remote locations. Information is shared and gathered in a central point and compiled and then redistributed for comment. The method is highly interpersonal and requires significant judgment.

Question 22

An increase in production levels within a relevant range most likely would result in:

a. Increasing the variable cost per unit.
b. Decreasing the total fixed cost.
c. Decreasing the variable cost per unit.
d. Increasing the total cost.

Answer 22

Choice “d” is correct. An increase in production levels within the relevant range would likely cause variable costs to increase. While fixed costs would remain constant, total costs would increase.

Question 23

A company is offered a one-time special order for its product and has the capacity to take this order without losing current business. Variable costs per unit and fixed costs in total will be the same. The gross profit for the special order will be 10%, which is 15% less than the usual gross profit. What impact will this order have on total fixed costs and operating income?

a. Total fixed costs increase, and operating income decreases.
b. Total fixed costs do not change, and operating income increases.
c. Total fixed costs do not change, and operating income does not change.
d. Total fixed costs increase, and operating income increases.

Answer 23

Choice “b” is correct. Adding a job with a positive contribution margin within idle capacity will increase operating income. The company will still make a profit for the special order even though the gross profit percent will be lower. The question states that fixed costs in total will be the same (i.e., the company is operating within the relevant range). Variable costs per unit will be the same.
Note: Fixed costs per unit decrease with increased production.

Question 24

The CPA reviewed the minutes of a board of director’s meeting of LQR Corp., an audit client. An order for widget handles was outsourced to SDT Corp. because LQR couldn’t fill the order. By having SDT produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been lost. The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was completed. Which of the following statements is correct regarding LQR’s action?

a. Accounting profit is total revenue minus explicit costs and implicit costs.
b. Explicit costs are opportunity costs from purchasing widget handles from resource market.
c. Implicit costs are not opportunity costs because they are internal costs.
d. The use of resource markets outside of LQR involves opportunity cost.

Answer 24

Choice “d” is correct. The use of resource markets outside of LQR involves opportunity cost. Opportunity costs are costs that would have been saved or the profit that would have been earned if another decision alternative had been selected. Financial accounting records do not record opportunity costs.

Question 25

Which of the following statements is true regarding opportunity cost?

a. Idle space that has no alternative use has an opportunity cost of zero.
b. Opportunity cost is representative of actual dollar outlay.
c. The potential benefit is not sacrificed when selecting an alternative.
d. Opportunity cost is recorded in the accounts of an organization that has a full costing system.

Answer 25

Choice “a” is correct. Opportunity cost is the potential benefit lost by selecting a particular course of action. If idle space has no alternative use, there is no benefit foregone; opportunity cost is zero.

Question 26

In managerial accounting, the term “relevant range” is often used to describe:

a. The range over which cost relationships are valid.
b. The range over which relevant costs are incurred.
c. The range over which costs fluctuate.
d. The theoretical maximums and minimum ranges the company could operate in.

Answer 26

Choice “a” is correct. Relevant range is the range of activity within which the relationships of fixed costs and variable costs are meaningful and valid.

Question 27

Break-even analysis assumes that over the relevant range:

a. Unit variable costs are unchanged
b. Unit revenues are nonlinear
c. Total costs are unchanged
d. Total fixed costs are nonlinear

Answer 27

Choice “a” is correct. Break-even analysis assumes that all variable costs and revenues are constant on a per unit basis and are linear over a relevant range. Fixed costs in total are constant.

Question 28

Jackson Co. is considering a project that will use 2,000 square feet of storage space at one of its facilities to store used equipment. What will determine Jackson’s opportunity cost?

a. The depreciation expense on the space.
b. The internal rate of return of the project.
c. The net present value of the project.
d. The value of the next best use of the space.

Answer 28

Choice “d” is correct. Opportunity cost is the next best use of productive capacity. The production that is forfeited to produce the special order is referred to as the next best alternative use of the facility.

Question 29

Which of the following costing methods will yield the lowest inventory value?

a. Hybrid.
b. Variable.
c. Absorption.
d. Process.

Answer 29

Choice “b” is correct. Variable costing typically produces the lowest inventory values since only variable costs are capitalized. Other methodologies of inventory accounting will account for fixed costs in inventory and result in greater values than variable costing.

Question 30

In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient idle capacity, which one of the following is not relevant to the decision?

a. Variable costs.
b. Incremental costs.
c. Absorption costs.
d. Direct costs.

Answer 30

Choice “c” is correct. Absorption costs are not relevant in situations when management must decide on accepting or rejecting one-time-only special orders, and where there is sufficient idle capacity.

Question 31

Arbor Corporation uses the coefficient of correlation to measure the strength of the cost volume relationships used in planning. When reviewing variable costs and volume, Arbor would be most likely to find a coefficient of correlation equal to:

a. 1.0
b. 0.0
c. -0.5
d. -1.0

Answer 31

Choice “a” is correct. Arbor would expect a coefficient of correlation equal to 1.0. The positive measure would reflect the strong direct relationship assumed in CVP analysis, where total variable costs increase proportionally with volume.

Question 32

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

a. Measure of the proximity of actual data points to the estimated data points.
b. Percentage of variation in the independent variables explained by the variation in the dependent variable.
c. Coefficient of the independent variable divided by the standard error of regression coefficient.
d. Percentage of variation in the dependent variable explained by the variation in the independent variables.

Answer 32

Choice “d” is correct. The coefficient of determination (R2) is the proportion of the total variation in the dependent variable (y) explained by the independent variable (x).

Question 33

Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?

a. When production is greater than sales, absorption costing income is greater than variable costing income.
b. When production equals sales, absorption costing income is less than variable costing income.
c. When production is less than sales, absorption costing income is greater than variable costing income.
d. When production equals sales, absorption costing income is greater than variable costing income.

Answer 33

Choice “a” is correct. When production is greater than sales, absorption costing income is greater than variable costing income. Production in excess of sales result in increases in inventory that include capitalization of fixed product costs that are immediately expensed under variable costing. Since costs that are used in the determination of net income for variable costing are accounted for in inventory for absorption costing, absorption costing will produce higher net income than variable costing when production is greater than sales.

Question 34

In using regression analysis, which measure indicates the extent to which a change in the independent variable explains a change in the dependent variable?

a. p-value.
b. t-statistic.
c. Standard error.
d. R-squared.

Answer 34

Choice “d” is correct. R-squared is the coefficient of determination and is the proportion of the total variation in a dependent variable (y) explained by the independent variable (x).

Question 35

Which of the following is most useful when risk is being prioritized?

a. Low and high-degree loss exposures.
b. Uncontrollable risks.
c. Expected value.
d. Low and high probability exposures.

Answer 35

Choice “c” is correct. Expected value computations that assign probabilities to potential outcomes quantify both the likelihood (percentage) and outcome (amounts) into a single value. Expected value is therefore the most useful of the listed statistics when risk is being prioritized.