BEC 6: Planning, Control & Analysis

Which of the following is a measure of the volatility of an investment?

Standard deviation. The standard deviation is a measure of the volatility of an investment and is the most common measure of investment

A vendor offered Wyatt Co. $25,000 compensation for losses resulting from faulty raw materials. Alternately, a lawyer offered to represent Wyatt in a lawsuit against the vendor for a $12,000 retainer and 50% of any award over $35,000. Possible court awards with their associated probabilities are: Award Probability $75,000 0.6 0 0.4 Compared to accepting the vendor's offer, the expected value for Wyatt to litigate the matter to verdict provides a

The expected value for Wyatt to litigate the matter takes into account the probabilities of possible outcomes. There is a 60% probability of Wyatt receiving an award of $75,000, of which $12,000 will be paid as retainer and $20,000 will be paid as the lawyer's share of awards ([$75,000 - $35,000] x 50%). In this case, there is 60% probability of net awards to Wyatt of $43,000 ($75,000 - $12,000 - $20,000). There is a 40% probability that Wyatt will win no award and will still pay $12,000 as retainer. The expected value of both probabilities is determined by the sum of potential winnings multiplied by respective likelihoods and is $21,000 ([$43,000 x 60%] + [$-12,000 x 40%]). This is a $4,000 loss because $21,000 is $4,000 less than the vendor's offer of $25,000

Which of the following are processes involved in project management?

The five processes involved in project management are initiation, planning, execution, monitoring and control, and closure. Neither recording nor funding are included.

A company estimates that it will sell 100,000 units of finished goods in March. Each finished good requires 5 feet of raw materials. The projected March 1 inventory balances are 10,000 units of finished goods and 40,000 feet of raw materials. Desired March 31 inventory levels are 9,000 units of finished goods and 42,000 feet of raw materials. What amount of raw materials should the company plan to purchase during March?

The number of raw material units is computed as follows: Budgeted Production 100,000 X 5 = 500,000 + Desired End In 9,000 X 5 + 42K = 87,000 = Total production 587,000 - Beginning inventory 10,000 X 5 + 40K = (90K) = Unites to be purchased 497K

Crisper, Inc. plans to sell 80,000 bags of potato chips in June, and each of these bags requires five potatoes. Pertinent data includes: Bags of potato chips Potatoes Actual June 1 inventory 15K bags 27K potatoes Desired June 30 inventory 18K bags 23K potatoes What number of units of raw material should Crisper plan to purchase?

The number of raw material units is computed as follows: Budgeted Production 80,000 X 5 = 400,000 + Desired End In 18,000 X 5 + 23K = 113,000 = Total production 513,000 - Beginning inventory 15,000 X 5 + 27K = (102K) = Unites to be purchased 411K

JacKue Co. plans to produce 200,000 pairs of roller skates during January of next year. Planned production for February is 250,000 pairs. Sales are forecasted at 180,000 pairs for January and 240,000 pairs for February. Each pair of roller skates has eight wheels. JacKue's policy is to maintain 10% of the next month's production in inventory at the end of a month. How many wheels should JacKue purchase during January?

The number of wheels JacKue Co. should purchase in January is computed as follows: Budgeted Production 200,000 X 8 = 1,600,000 + Desired ending inventory 250K X 10% X 8 = 200K = Total production 1,800,000 - Beginning inventory 200,000 X 10% X 8 (160,000) = Units to be purchased 1,640,000

An accountant has been retained by a company as an investment advisor for its employees. Research of historical rates of return yields the following information: Type of investment Mean return Standard deviations Common stocks 12% 20% Long-term corporate bonds 6% 8% Intermediate-term government bonds 5% 5% U.S. Treasury bills 4% 3% Which of the following investments has the greatest reward/risk ratio if a return's standard deviation is an accurate assessment of investment risk?

The reward to risk ratio is the mean return divided by the standard deviation. It is 12%/20% or 60% for common stock, 6%/8% or 75% for long-term corporate bonds, 5%/5% or 100% for intermediate-term government bonds, and 4%/3% or 133 1/3% for US Treasury bills, which would be the highest.

A company would most benefit from using an activity-based costing (ABC) system as opposed to a traditional costing system under which of the following conditions?

When indirect cost are a high percentage of total costs. When indirect costs are a high percentage of total costs, it becomes important to assign indirect costs in a manner that reflects the underlying incurrence of cost accurately. When each department within the company has a single activity, assigning the same cost to any product passing through that department generally will reflect the underlying incurrence of cost accurately. When different products use the different activities of the department in the same proportions, assigning the same cost to any product passing through that department generally will reflect the underlying incurrence of cost accurately. When batch-level and product-sustaining costs are immaterial, the benefit of more accurate cost assignment available through use of an ABC system is less than the additional cost to implement and maintain the more complex system.

In year 1, a large domestic manufacturer produces all of its motors domestically and sells them internationally. The company's management team is in the process of developing its year 2 budget, and copper costs represent a significant line item in the budget. In year 1, the company spent $1,000,000 in purchasing 250,000 pounds of copper. Economic data indicate that in year 1 copper costs had a price index of 120.0, and expectations are that the index will increase to 126.0 in year 2. Management anticipates a 5% increase in copper usage for year 2. What amount represents the year 2 budget for copper purchases?

With an expected usage increase of 5%, the entity will use 250,000 x 1.05 or 262,500 pounds of copper in year 2. In year 1, the cost of 250,000 pounds was $1,000,000 or $4 per pound. An expected price index increase from 120 to 126 will increase the price to $4.00 x 1.26/1.20 or $4.20 per pound. As a result, the year 2 budget for copper purchases will be 262,500 x $4.20 or $1,102,500.

A basic assumption of activity-based costing (ABC) is that

products or services require the performance of activities

Rishard Corporation has a cash flow hedge that has increased in value by $60,000 during the year. The hedge is highly effective, and 95% of the change is expected to offset changes in future cash flows on the hedged transaction. How will Rishard report the $60,000 increase?

$57,000 of the gain will be reported in other comprehensive income and the remainder will be reported income. When a derivative is accounted for as a cash flow hedge, any gain or loss due to a change in the value of the hedge will be reported in other comprehensive income to the extent that the hedge is effective. With 95% effectiveness, $57,000 will be reported in OCI. The ineffective portion recognized in income.

The following is a summarized income statement of Carr Co.'s profit center No. 43 for March 20X2: Contribution margin $70,000 Period expenses: Manager's salary $20,000 Facility depreciation 8,000 Corporate expense allocation 5,000 33,000 Profit center income $37,000 Which of the following amounts would most likely be subject to the control of the profit center's manager?

A profit center manager is responsible for the revenues earned and the costs incurred by that center provided both those revenues and costs are within the control of the manager. A manager does not have control over allocated corporate expenses, depreciation, or their own salary. Consequently, the profit center manager would only be responsible for the contribution margin of $70,000.

Credit default swaps (CDS)

Are largely akin to insurance protection against the possibility that bond issuers will fail to make coupon face value payments

Which of the following is one of the four perspectives of a balanced scorecard?

Balanced Scorecard: Financial Information Customer Satisfaction Internal Process Innovation "Learning and Growth"

Benchmarking

Benchmarking involves comparisons within or outside a firm in order to evaluate performance. Companies may engage in benchmarking to identify "best practices" which can then be implemented and used to set performance standards. Total quality management is a company wide effort to continuously improve the ability to deliver high quality products and services. Statistical process control is a form of quality control that employees statistical techniques. Economic value added refers to the value created in excess of an entity's required return.

Which of the following definitions best characterizes benchmarking

Benchmarking is a process by which targets, referred to as benchmarks, are established to enable an entity to compare its performance to expectations, typically based on the experience of other entities that perform similar functions and are considered to perform favorably. Examining product and process attributes to identify areas for improvement, developing effective methods for completing tasks, and redesigning processes within an organization are all aspects of business process management and are not associated with benchmarking.

Which of the following budgets provides information for preparation of the owner's equity section of a budgeted balance sheet?

Budgeted Income Statement provides budgeted net income or loss that would be added to owner's equity

Which of the following balanced scorecard perspectives examines a company's success in targeted market segments?

Customer: The Balanced Scorecard is a strategic performance measurement and management framework for translating an organization's mission and a specific strategy into a set of performance measures. These performance measures are grouped into four primary perspectives. The customer perspective identifies the targeted market segments and measures the company's success in these segments, because market segments typically are divided by customer types.

Which of the following forecasting methods relies mostly on judgment?

Delphi. Is a structured forecasting method based on the collective judgement of a group of experts. Each expert's judgement is involved; the forecasts will become more accurate after each round after which experts can revise their previous answers

A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

Employee benefits expense. Activity-based costing (ABC) systems are most appropriate for companies that produce heterogeneous (different) products or product lines. ABC systems assign overhead costs based on the product's requirements for resource-consuming activities, and therefore eliminate the arbitrary assignment of overhead costs. Employee benefits expense most likely uses salary expense as a cost driver, rather than machine hours. Machine hours would more likely be the cost driver for electricity expense, repair and maintenance expense, and depreciation expense.

Which tool would most likely be used to determine the best course of action under conditions of uncertainty?

Expected value (EV) Under Conditions of uncertainty, decisions regarding the best course of action should take into account the probability of various possible outcomes and the related financial results. Expected value considers the financial result according to the probability of occurrence to determine the long-term average outcome that would be achieved if such a decision were applied to numerous transactions, taking into consideration conditions of uncertainty

Which of the following factors is not characteristic of the efficient markets hypothesis?

Financial managers can benefit from timing the sales and purchases of securities.

A 20X5 cash budget is being prepared for the purchase of Toyi, a merchandise item. Budgeted data are: Cost of goods for 20X5 $300,000 Accounts payable 1/1/X5 $20,000 Inventory - 1/1/X5 $30,000 Inventory - 12/31/X5 $42,000 Purchases will be made in twelve equal monthly amounts and paid for in the following month. What is the 20X5 budgeted cash payment for purchases of Toyi?

If Toyi is anticipating cost of goods sold of $300,000 and an increase in inventory of $12,000, total purchases for the period will be $312,000 or $26,000 per month. Duing 20X5, Toyi will pay the beginning balance in accounts payable of $20,000 and will pay for purchases made in January through November, 11 x $26,000, or $286,000. As a result, total payments for merchandise will be $306,000 during 20X5, and accounts payable at 12/31 will be equal to December purchases of $26,000.

A company is considering acquiring a derivative to hedge a risk associated with an investment it is currently holding. Which of the following coefficients of variation would indicate that the hedge will be effective?

In order for a hedge to be effective in offsetting a risk associated with an investment, it should respond to market conditions in the opposite way that the hedged investment acts. The closer a coefficient of variation is to 0, the less of relationship there is between the two items. A coefficient of +1 indicates the two act in pretty much precisely the same manner and a coefficient of -1 indicates that they act in opposite manner. A coefficient of -0.91 would indicate a strong inverse relationship and a potentially effective hedge

During the month of March, Nale Co. used $300,000 of direct materials. At March 31, Nale's direct materials inventory was $50,000 more than it was at March 1. Direct material purchases during the month of March amounted to:.

In order to use $300,000 in direct materials during a period and increase direct materials inventory by $50,000 would require the purchase of $300,000 + $50,000 or $350,000.

An entity is examining potential investments and notes that 1-year maturity yields are higher than those for 10-year maturities. Which of the following explanations for this occurrence is best?

Investors are expecting reduced inflation in the future as reflected in the lower long-term returns Typically, long-term yields are greater than short-term yields due to a maturity premium. If investors expect low inflation in the future, the reduced or eliminated inflation premium may offset the maturity premium. Investments with higher liquidity typically carry a lower rate of return than investments with low liquidity. Long-term investments can have immediate default risk. Long-term investments typically have a higher rate of return to compensate the investor for tying up the funds for longer than short-term investments.

Which of the following performance measures is nonfinancial?

Percentage of defective products. The percentage of defective products measures the quality of production but is measured in terms of units, not costs, making it a nonfinancial indicator. The return on investment is a financial measure of the success of a company calculated, by dividing income by assets. The gross profit margin is a financial measure of how much the sale of the company's products contributes to paying expenses and providing a profit calculated, by subtracting cost of goods sold from revenues. The economic value-added is a financial measure of the value being created in a company in excess of its required return on capital, calculated by subtracting financing costs from net operating profits after taxes.

As part of a benchmarking process, a company's costs of quality for the current month have been identified as follows: Employee training $20,000 Product recalls $8,000 Scrap $4,500 Quality inspectors $48,000 Preventative maintenance $19,500 Supplier education expense $17,500 Materials inspection expense $60,000 Processing product returns $2,500 What amount is the company's prevention cost for the current month?

Prevention costs are incurred specifically to prevent manufacturing defects .Of the listed expenses, employee training, preventive maintenance, and supplier education all improve the quality of manufacturing before inspection of the goods for defects ($57,000 = $20,000 + $19,500 + $17,500).

The basic assumption of activity-based costing (ABC) is that

Products or services require the performance of activities and activities consume resources

Which of the following is a characteristic of a flexible budget?

Provides budgeted numbers for various activity levels. A flexible budget is actually a formula in which total costs within a relevant range are measured as total fixed cost plus the variable cost per unit of volume multiplied by the volume. As a result, it provides budgeted numbers for various levels of activity