Projecting and Forecasting Part 1

Question 1

MCQ-03788
Probability (risk) analysis is:

A. Used only for situations involving five or fewer possible outcomes.

B. Used only for situations in which the summation of probability weights is greater than one.

C. An extension of sensitivity analysis.

D. Incompatible with sensitivity analysis.

Answer 1

Choice “C” is correct. Probability (risk) analysis is used to examine the possible outcomes given different alternatives.

Sensitivity analysis uses a trial and error method
in which the sensitivity of the solution to changes in variables is calculated.

Therefore, probability analysis is an extension of sensitivity analysis.

Question 2

Smith Legal Services has offered to represent a plaintiff in a lawsuit for a retainer of $20,000 plus 40% of any award over $20,000. Smith expects to incur out-of-pocket
expenditures of $15,000 in litigating the suit. Possible court awards with their associated probabilities are:

Award Probability
$100,000 0.7
$0 0.3

What is the expected value to Smith of the lawsuit?
A. $25,900
B. $27,400
C. $33,000
D. $37,000

Answer 2

Choice “B” is correct. The expected value of the lawsuit will be equal to the weighted outcomes based on probabilities.
The two scenarios are described below:

Award: $100,000, with a probability of 70%. Value to Smith = $20,000 retainer + 40% ($100,000 award − $20,000 threshold) − $15,000 expenditures = $37,000.

Award: $0, with a probability of 30%. Value to Smith = $20,000 retainer − $15,000 expenditures = $5,000.

Expected value = (70% × $37,000) + (30% × $5,000) = $25,900 + $1,500 = $27,400

Question 3

MCQ-14814
A company has determined that its sales to residential home builders tend to vary with changes in the prime interest rate. Sales this year will be $5 million. The following
information is available:

Prime Interest Rate : Probability / Sales Growth
Increases 2%: 15% / (20%)
Increases 1%: 40% / 3%
Unchanged: 35% / 5%
Decreases 1%: 10% / 8%

What amount is the expected value of the company’s sales for the coming year’s budget?

A. $5,037,500
B. $5,150,000
C. $5,172,500
D. $5,337,500

Answer 3

Choice “A” is correct. The expected growth in company sales is calculated by taking each estimate of sales growth and multiplying it by the probability of its occurrence.
Then, the expected growth is multiplied by current year sales to determine the expected change in sales value. Adding the change to the current year sales estimate
results in the expected value for sales next year.

Expected sales growth percentage: [15% × (−20%)] + (40% × 3%) + (35% × 5%) + (10% × 8%) = 0.75% growth

Expected sales growth in dollars: $5,000,000 × 0.75% = $37,500

Expected sales value: $5,000,000 + $37,500 = $5,037,500.

Question 4

MCQ-03932
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 engineering method.
B. The account analysis method.
C. The high-low method.
D. The regression analysis method.

Answer 4

Choice “D” 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.

Choice “A” is incorrect. The engineering method uses such methods as time and motion study to classify costs. It can only be used where there is an observable relationship between the inputs and the outputs.

Choice “B” is incorrect. The account analysis method is merely a review of all the accounts by someone knowledgeable of the activities of the firm. It is only as good as the person making the judgments.

Choice “C” is incorrect. The high-low method is a simplified approach that uses only the points of highest and lowest activity. The regression method considers every point
of activity.

Question 5

________________ is a statistical model that can estimate the dependent cost variable based on changes in the independent variable.

Answer 5

Regression analysis

Question 6

______________________ is assumed (not estimated) in
regression analysis and is based on activity, rather than costs

Answer 6

An independent variable

Question 7

The ___________________ is a statistical measure used to
evaluate the results of regression analysis.

Answer 7

coefficient of determination

Question 8

Multiple regression differs from simple regression in that it:

A. Provides an estimated constant term.
B. Has more dependent variables.
C. Allows the computation of the coefficient of determination.
D. Has more independent variables.

Answer 8

Choice “D” 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 9

MCQ-11113
Roger Co. implemented activity-based costing in the current year. To select the appropriate
driver for Cost Pool A, Roger performed regression analyses for two independent variables,
Driver 1 and Driver 2, using monthly operating data. The monthly levels of Cost Pool A were
the dependent variables in both regressions. Output results from the regression analyses
were as follows:
Driver 1 Driver 2
R squared 0.46 0.80
Intercept $551.00 $970.00
X variable (slope) $0.55 $0.33
At the budgeted production level for next month, the levels of Driver 1 and Driver 2 are expected to be 5,880 and 7,000, respectively. Based on this information, what is the
budgeted amount for Cost Pool A for next month?

Answer 9

Choice “B” is correct. In deciding between two potential cost drivers and using regression analysis, the best cost driver to use is the one with the higher R squared. R squared represents the coefficient of determination, where a higher number indicates a better “fit” of the regression line.

Driver 2 will therefore be the driver, and the regression
equation will be equal to $970 + $0.33X.

If X is 7,000, then the budgeted amount for Cost Pool A is equal to $970 + $0.33(7,000) = $3,280.

Question 10

MCQ-07050
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. -0.5
B. -1.0
C. 0.0
D. 1.0

Answer 10

Explanation
Choice “D” 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.

Choice “A” is incorrect. A negative coefficient of correlation indicates an inverse
relationship. This would illogically presume that variable costs decrease as volume
increases. Cost volume relationships are not only positive but are assumed to be
proportional.

Choice “B” is incorrect. A coefficient of correlation of -1.0 indicates a perfect inverse
relationship. This would imply that costs go down as volume increases. In the relevant
range, costs and volume are expected to increase (not decrease) proportionately.
Choice “C” is incorrect. A coefficient of correlation of 0 indicates no relationship
between costs and volume. We would expect this relationship for fixed costs, not
variable costs.

Question 11

MCQ-04799
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. Y has a value of $322,897 when X equals zero.
B. X has a value of $322,897 when Y equals zero.
C. The residual error of the regression is $322,897.
D. Maintenance cost has an average value of $322,897.

Answer 11

Choice “A” 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.

Choice “B” is incorrect. The “x” axis, or independent variable, measures production in units, not dollars (per above).

Choice “C” is incorrect. The “y” intercept is not the residual error of the regression.

Choice “D” is incorrect. The “y” intercept is not the average cost. It is most likely the
amount of fixed maintenance costs.

Question 12

Using regression analysis, Fairfield Co. graphed the following relationship of its cheapest
product line’s sales with its customers’ income levels:

“AS INCOME INCREASES, SALES DECREASE”

If there is a strong statistical relationship between the sales and customers’ income levels,
which of the following numbers best represents the correlation coefficient for this relationship?

A. - 9.00
B. - 0.93
C. +0.93
D. +9.00

Answer 12

oice “B” is correct. The correlation coefficient measures the strength of the
relationship between variables. It is a number between -1 and +1. If the relationship is strong, it will have a coefficient near +1 or -1 depending on the slope of the relationship. In this case, the descending relationship has a negative slope. The correlation coefficient will be close to -1, or -0.93 as given.

Choice “A” is incorrect. The correlation coefficient is a number between +1 and -1.

Choice “C” is incorrect. The relationship between sales and income levels is downward
sloping, indicating a negative relationship, not a positive one.

Choice “D” is incorrect. The correlation coefficient is a number between +1 and -1

Question 13

Two decrease risk, you should purchase stocks that are ________________________ correlated?

Answer 13

Negatively

Question 14

MCQ-08300

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. R-squared.
C. Standard error.
D. t-statistic

Answer 14

Choice “B” 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).

Choice “A” is incorrect. The p-value is a statistical measure of the likelihood that tested data could have occurred by chance.

Choice “C” is incorrect. The standard error is a measure of the standard deviation or average variability of a sampling distribution.

Choice “D” is incorrect. The t-statistic is used in hypothesis testing and the computation of confidence levels

Question 15

MCQ-07088
The coefficient of determination, R , in a multiple regression equation is the:

A. Percentage of variation in the independent variables explained by the variation in
the dependent variable.
B. Percentage of variation in the dependent variable explained by the variation in
the independent variables.
C. Measure of the proximity of actual data points to the estimated data points.
D. Coefficient of the independent variable divided by the standard error of
regression coefficient.

Answer 15

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

Choice “A” is incorrect. The independent variable is not explained by the dependent
variable. Changes in the independent variable drive the variation in the dependent
variable. The coefficient of determination (R ) is the proportion of the total variation in the dependent variable (y) explained by the independent variable (x).

Choice “C” is incorrect. The measure of proximity of actual data points to estimated
data points is not the coefficient of determination. The coefficient of determination (R )
is the proportion of the total variation in the dependent variable (y) explained by the
independent variable (x).
Choice “D” is incorrect. The coefficient of determination (R ) is the proportion of the
total variation in the dependent variable (y) explained by the independent variable (x),
not the coefficient of the independent variable divided by the standard error of
regression coefficient.

Question 16

What is the equation of a straight line with respect to high-low analysis?

Answer 16

[Y = (VC * X) + FC]

Question 17

Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first 4 months of Year 1. What was the variable order filling cost component per
order?

Month Orders Cost
January 1,200 $3,120
February 1,300 3,185
March 1,800 4,320
April 1,700 3,895

A. $2.00
B. $2.42
C. $2.48
D. $2.50

Answer 17

Once you identify it’s a High/low question:

Find High and low values

In this case they’re looking for Cost per Order OR Cost/Order

So cost is the Numerator and Order in the denominator

Equation to solve:
$4320-$3120 / 1800-1200
= 1200 / 600
= $2

Question 18

MCQ-04642

Trijonis Company estimated its material handling costs at two activity levels, as follows:

Kilos Handled Cost
80,000 $160,000
60,000 $132,000

What is Trijonis’ estimated cost for handling 75,000 kilos?

A. $150,000
B. $153,000
C. $157,500
D. $165,000

Answer 18

Choice “B” is correct. Using the high-low method, the variable cost per kilo can be determined by dividing the change in cost ($160,000 - $132,000) by the change in volume (80,000 - 60,000):

160000-132000 / 80000-60000
= 28000 / 20000
= $1.40 per kilo

Next plug EITHER set of numbers into the regression formula:

y = a + b(x)
SOLVE FOR a:
160,000 = a + $1.40(80000)
160,000 = a + 112,000
a = $48,000

NOW plug back into the regression formula with x = 75000

Y = 48000 + $1.40(x)
Y = 48000 + $1.40(75000)
Y = $153,000

Therefore the answer is B

note: Y is dependent, while x is independent

Question 19

MCQ-04234
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. Learning curve analysis.

C. Regression analysis.

D. Continuous probability simulation.

Answer 19

Choice “B” 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.

Choice “A” is incorrect. Expected value analysis represents the long-term average of repeated trials and is found by multiplying the probability of each outcome by its payoff and then summing the results.

Choice “C” is incorrect. Regression analysis is a statistical model that can estimate the dependent cost variable based on changes in the independent variable.

Choice “D” is incorrect. Continuous probability simulation is a procedure that studies a
problem by creating a model of the process and then, through trial and error solutions,
attempts to improve the problem solution.

Question 20

__________________represents the long-term average of repeated trials and is found by multiplying the probability of each outcome by its payoff and then summing the results.

Answer 20

Expected value analysis

Question 21

__________________________ 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.

Answer 21

Learning curve analysis

Question 22

_______________________is a statistical model that can estimate the dependent cost variable based on changes in the independent variable.

Answer 22

Regression analysis

Question 23

____________________ is a procedure that studies a problem by creating a model of the process and then, through trial and error solutions, attempts to improve the problem solution.

Answer 23

Continuous probability simulation

Question 24

MCQ-03785
Given that demand exceeds capacity, that there is no spoilage or waste, and that there is
full utilization of a constant number of assembly hours, the number of components needed for an assembly operation with an 80 percent learning curve should

I. Increase for successive periods.
II. Decrease per unit of output.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

Answer 24

Choice “A” is correct. The learning curve relates to the efficiency with which productive resources, typically labor, are employed, and it suggests that productivity will increase over time. Therefore, the number of components needed for an assembly operation with an 80 percent learning curve will increase for successive periods to accommodate
increased production, assuming demand exceeds capacity, there is no spoilage and that there is full utilization of a constant number of assembly hours.

Choice “B” is incorrect. The learning curve relates to the efficiency with which productive resources, typically labor, are employed. Assuming constant hours and no spoilage, the number of components per unit of output will remain unchanged, but
productivity will increase. This in turn will cause the number of components needed for assembly to increase for successive periods, to accommodate increased production.

Choice “C” is incorrect. Only the number of units will increase to accommodate increased production. The number of components per unit of output will not decrease since we assume that there is not spoilage or waste. Yield per direct material is unchanged, yield per hour of work and, by extension, demand for components (direct material), will increase

CHOICE D is obviously wrong since I applies.

Question 25

MCQ-04236
It is estimated that a particular manufacturing job is subject to an 80 percent learning curve.
The first unit required fifty labor hours to complete. What is the cumulative average time per
unit after completing four units?

A. 50.0 hours.
B. 40.0 hours.
C. 32.0 hours.
D. 30.0 hours.

Answer 25

Choice “C” is correct. 32.0 hours cumulative average time per unit after completing four units

Every time units double, we see a 20% reduction in the hours needed to produce that unit (denoted by the 80 percent learning curve).

Cumulative # of Units Average Time Per Unit
1 50 Hours
2 40 Hours (50 × 0.8)
4 32 Hours (40 × 0.8)

Rule: The basic premise of the learning curve is that operating efficiency and/or production increases in repetitive tasks as experience is gained. The rate of
improvement, measured by the learning curve, has a regular pattern that can be stated
as follows:
As cumulative quantities double, average cost per unit decreases by a specified
percent of the previous cost.

Question 26

What is the basic premise for patterns in the learning curve model?

Answer 26

As cumulative quantities double, average cost per unit decreases by a specified percent of the previous cost.

The basic premise of the learning curve is that operating efficiency and/or production increases in repetitive tasks as experience is gained. The rate of
improvement, measured by the learning curve, has a regular pattern that can be stated as a fixed % reduction as units double.

ex/ Cumulative # of Units Average Time Per Unit
1 100Hours
2 80 Hours (100 × 0.8)
4 64 Hours (80 × 0.8)