5D2 - Forecasting and Projection

The inherent simplifying assumptions used in CVP analysis are the following:

See below

Total fixed costs

are constant over the relevant range of volume.

Under time series analysis, there are four components that contribute to patterns over time. Which of the following is not one of the components? Seasonal variation Regular intervals Cyclical variation Trends

Regular intervals

How many levels of interdependence are included in integrated planning?

Three levels

Multiple regression differs from simple regression in that it:

has more independent variables.

The sales mix

remains constant.

Financial statement analysis is not

used in a learning curve analysis.

The CPA reviewed the minutes of a board of directors meeting of LQR Corp., an audit client. An order for widget handles was outsourced to SDT Corp. because LQR could not 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?

The use of resource markets outside of LQR involves opportunity cost.

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?. The net present value of the project The internal rate of return of the project The value of the next best use of the space The depreciation expense on the space

The value of the next best use of the space

Linear programming is

a model for the allocation of scarce resources.

Productivity and efficiency

are constant.

A

is the y intercept.

The controller of Gray, Inc., has decided to use ratio analysis to analyze business cycles for the past two years in an effort to identify seasonal patterns. Which of the following formulas should be used to compute percentage changes for account balances for Year 1 to Year 2?

(Current balance - Prior balance) / Prior balance

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% learning curve should: I. increase for successive periods. II. decrease per unit of output.

I only

Integrating mechanisms

connect the information, tasks, and resources with the work groups in the organization.

The breakeven point

is directly related to costs and indirectly related to the budgeted margin of safety and the contribution margin.

Which of the following is a technique for assessing the potential effect of risk in a capital budgeting project? Sensitivity analysis Adjusting required rate of return Adjusting estimated future cash inflows All of the answer choices are correct.

All of the answer choices are correct.

Which of the following statements is false when developing a payoff table? A payoff table is used to assist in decision making. A payoff table includes several decision alternatives. The possibilities must equal 1.0. All possibilities are given equal weight.

All possibilities are given equal weight.

In business information systems, the term "stakeholder" refers to which of the following parties? The management team responsible for the security of the documents and data stored on the computers or networks Information technology personnel responsible for creating the documents and data stored on the computers or networks Authorized users who are granted access rights to the documents and data stored on the computers or networks Anyone in the organization who has a role in creating or using the documents and data stored on the computers or networks

Anyone in the organization who has a role in creating or using the documents and data stored on the computers or networks

Which of the following is not a ratio utilized in the planning and forecasting process? Free cash flow Additional funds needed formula Capital intensity ratio Capital asset ratio

Capital asset ratio

An investor uses risk analysis to measure the probability of the variability of future returns from a proposed investment. What is the approach that is based upon utility theory and compels the decision maker to choose at what point he or she is indifferent to the choice between a certain amount of money and the expected value of a risky amount? Capital Asset Pricing Model Certainty equivalent adjustments Risk-adjusted discount rates Sensitivity analysis

Certainty equivalent adjustments

When preparing a sales forecast, which of the following factors is not taken into consideration? Competition Economic conditions Customer needs/wants Industry trends

Competition

company is considering replacing a piece of equipment with a more efficient model. Which of the following is not a consideration in that decision? Cost of the equipment to be replaced Cost of capital Tax implications Cost of the new model

Cost of the equipment to be replaced

economic order quantity formula Q = the square root of 2DS/Ci,

D signifies the demand per year in units; S is the setup or ordering cost per order; C is the cost per unit; and i is the carrying cost, expressed as a percentage of inventory cost (C times i is the carrying cost per unit).

When production levels are expected to increase within a relevant range and a flexible budget is used, what effect on each of the following costs would be anticipated?

Decrease in fixed costs per unit and no change in variable costs per unit

Older data is weighted less than newer or more recent data when using the statistical tool known as which of the following? Exponential smoothing Seasonal variation Trend analysis None of the answer choices are correct.

Exponential smoothing

Which one of the following is a sales forecasting technique? Linear programming Exponential smoothing Queuing theory Cost-volume-profit analysis

Exponential smoothing

Which of the following costs would decrease if production levels were increased within the relevant range?

Fixed costs per unit

Which of the following is not an equation for free cash flows? Free cash flow = Operating cash - Net investment Free cash flow = NOPAT - Net investment in operating capital Free cash flow = Operating cash flow - Gross investment in operating capital Free cash flow = EBIT (1 − Tax rate) + Depreciation and amortization

Free cash flow = Operating cash - Net investment

Which of the following is not an integrating mechanism? General personnel systems General management systems Increasing coordination potential Reducing the need for coordination

General personnel systems

In calculating the breakeven point for a multiproduct company, which of the following assumptions are commonly made when variable costing is used? Sales volume equals production volume. Variable costs are constant per unit. A given sales mix is maintained for all volume changes.

II and III Variable costs are constant per unit. A given sales mix is maintained for all volume changes.

Which of the following statements is true regarding opportunity cost? Opportunity cost is recorded in the accounts of an organization that has a full costing system. The potential benefit is not sacrificed when selecting an alternative. Idle space that has no alternative use has an opportunity cost of zero. Opportunity cost is representative of actual dollar outlay.

Idle space that has no alternative use has an opportunity cost of zero.

Which one of the following costs would be relevant in short-term decision making? Incremental fixed costs Total variable costs that will not change with either alternative Costs of fixed assets to be used in the alternatives Opportunity costs that are the same in the considered alternatives

Incremental fixed costs

Which of the following statements is true regarding outsourcing? It is usually cost-prohibitive. It is difficult to do. It works equally well for services as well as goods. It can only be done abroad.

It works equally well for services as well as goods.

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? Expected value analysis Learning curve analysis Regression analysis Exponential distribution analysis

Learning curve analysis

Which of the following may be used to estimate how inventory warehouse costs are affected by both the number of shipments and the weight of materials handled?

Multiple regression analysis

When comparing strategic planning with operational planning, which one of the following statements is most appropriate? Strategic planning is performed at all levels of management. Operational planning results in budget data. Strategic planning focuses on authority and responsibility. Operational planning is long-range in focus.

Operational planning results in budget data.

Egan Co. owns land that could be developed in the future. Egan estimates it can sell the land for $1,200,000, net of all selling costs. If it is not sold, Egan will continue with its plans to develop the land. As Egan evaluates its options for development or sale of the property, what type of cost would the potential selling price represent in Egan's decision? Sunk Opportunity Future Variable

Opportunity

What does integrated planning accomplish?

Participation of stakeholders and affected departments

There are three levels of interdependence in integrated planning:

Pooled Sequential Reciprocal

Management at MDK Corp. is deciding whether to replace a delivery van. A new delivery van costing $40,000 can be purchased to replace the existing delivery van, which cost the company $30,000 and has accumulated depreciation of $20,000. An employee of MDK has offered $12,000 for the old delivery van. Ignoring income taxes, which of the following correctly states relevant costs when making the decision whether to replace the delivery vehicle? Purchase price of new van, disposal price of old van, gain on sale of old van Purchase price of new van, purchase price of old van, gain on sale of old van Purchase price of new van, disposal price of old van Purchase price of new van, purchase price of old van, accumulated depreciation of old van, gain on sale of old van, disposal price of old van

Purchase price of new van, disposal price of old van

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?

Relevant cost

The income statement equation is:

Sales - Variable costs - Fixed costs = Net income or Sales - Variable costs = Fixed costs + Net income

If net income is zero (i.e., at the breakeven point):

Sales - Variable costs = Fixed costs Since Sales - Variable costs equals the contribution margin: Contribution margin = Fixed costs

Which of the following changes would cause a company's breakeven point in sales to increase? The company's contribution-margin rate increases. The company's variable cost per unit decreases. The company's total fixed costs increases. The company's selling price per unit increases.

The company's total fixed costs increases.

Correlation refers to the existence of a reliable relationship between two variables:

The dependent variable, the values that we would like to predict The independent variable, the values that we would like to use in the prediction process

The following table contains Emerald Corp.'s quarterly revenues, in thousands, for the past three years. During that time, there were no major changes to Emerald's selling strategies and total capital investment. Year 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. ------ -------- -------- -------- -------- Year 1 500 500 550 750 Year 2 525 550 600 800 Year 3 550 525 625 850 Which of the following statements best describes the likely cause of the fluctuations in Emerald's revenues and is the best response to those fluctuations? The fluctuations are from changes in the economy, and Emerald should examine its cost structure for potential changes. The fluctuations are from changes in the economy, and Emerald should manage its inventories and cash flow to match the cycle. The fluctuations are from the seasonal demand for Emerald's products, and Emerald should examine its cost structure for potential changes. The fluctuations are from the seasonal demand for Emerald's products, and Emerald should manage its inventories and cash flow to match the cycle

The fluctuations are from the seasonal demand for Emerald's products, and Emerald should manage its inventories and cash flow to match the cycle

In which of the following scenarios would a company not drop an existing product line? The product line, while not profitable, is covering some fixed costs. A better use of the capacity can be found. The product is no longer marketable. Eliminating the product line will increase overall profitability.

The product line, while not profitable, is covering some fixed costs.

Under what circumstances would a manufacturer accept a special order with special pricing?

The special-order price per unit exceeds the variable costs.

Which of the following limitations is common to the calculations of payback period, discounted cash flow, internal rate of return, and net present value? They do not consider the time value of money. They require multiple trial-and-error calculations. They require knowledge of a company's cost of capital. They rely on the forecasting of future data.

They rely on the forecasting of future data.

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?

Total fixed costs do not change, and operating income increases.

Cost-volume-profit analysis is

a model used to aid decision making relating to product lines, pricing of products, marketing strategy, and utilization of production facilities.

Sensitivity analysis is

any process that measures the impact of a change in a single variable or a combination of variables on profits or on some other decision variable.

Selling prices and unit variable costs

are constant. Selling price does not change with the activity level.

All costs

are either fixed or variable; i.e., costs can be separated into fixed and variable elements.

Changes in inventory

are insignificant.

The coefficient of variation and standard deviation

are measures of dispersion, not a weighted average of several amounts.

Costs and revenues

are predictable and are linear over the relevant range.

Sensitivity analysis in an investment project proposal:

calculates the change in the result due to a potential change in the project's cash flows.

Total variable costs

change proportionally with the activity level. Variable costs per unit are constant.

The financing section of a projected cash flow budget includes all of the following except: changes in accounts payable. debt borrowing. debt repayment. interest payments.

changes in accounts payable.

Exponential smoothing weights

current data heavier than older data. It is used to smooth forecast variation.

When using a flexible budget, a decrease in production levels within a relevant range:

decreases total costs.

The formula for computing the economic order quantity is Q = the square root of 2DS/Ci, where D is:

demand per year in units.

Production

equals sales or units produced equals units sold.

An objective function is an

equation to be minimized or maximized subject to certain constraints. It is not an average.

A relevant range

exists in which the various relationships are true.

In statistical analysis, a weighted average using probabilities as weights is the:

expected value.

Learning curve analysis can be used in all of the following ways except: bid preparation. financial planning. projection of labor requirements. financial statement analysis.

financial statement analysis.

At the breakeven point, the contribution margin equals total:

fixed costs.

Learning curve analysis involves applying a mathematical formula to estimate:

future time to produce units.

The major integrating mechanisms include:

general management systems, increasing coordination potential, and reducing the need for coordination

In a regression analysis, the coefficient of determination measures:

goodness of fit.

Jago Co. has two 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:

greater contribution margin per hour of manufacturing capacity.

When determining the optimum level of cash, management must consider all of the following, except: whether there is enough cash on hand to meet the disbursal needs that arise in the course of doing business. keeping idle cash to a minimum. the timing of cash flows as determined in the cash flow budget. how to maximize cash balances.

how to maximize cash balances.

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

increasing the total cost.

The coefficient of correlation, r

is a measure of the relative relationship (not the variance) between the two variables.

Correlation is a term frequently used in conjunction with regression analysis, and is measured by the value of the coefficient of correlation, r. The best explanation of the value r is that it:

is a measure of the relative relationship between two variables.

The product mix

is constant, or the firm has only one product.

Free cash flow

is the cash flow actually available for distribution to investors after the firm has made all necessary investments in fixed assets and working capital.

y

is the dependent variable since it is determined based on the other three terms.

x

is the independent variable since it is an input to the equation, not based on the other terms.

B

is the slope of the line. (Linear means a straight line, so the slope of the line is the same at any point on the line.)

The opportunity cost of making a component part in a factory with no excess capacity is the:

net benefit given up from the best alternative use of the capacity.

When an organization decides on a course of action that is selected from a group of alternative courses of action, the benefit lost by not choosing the best alternative course of action is the: incremental cost. net realizable value. avoidable cost. opportunity cost.

opportunity cost.

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

percentage of variation in the dependent variable explained by the variation in the independent variables.

Opportunity cost is the

possible benefit, savings, or income that is lost by not choosing the next best alternative.

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

potential effect on the decision.

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

r-squared

The forecasting technique most relevant for analyzing data prior to creation of a flexible budget is:

regression analysis.

Regression analysis

seeks to identify change in a dependent variable (such as cost) related to change in an independent variable (such as a cost driver). Simple regression estimates a relationship between one

Through the use of decision models, managers thoroughly analyze many alternatives and decide on the "best" alternative for the company. Often the actual results achieved from a particular decision are not what were expected when the decision was made. In addition, an alternative that was not selected may have actually been the best decision for the company. The appropriate technique to analyze the alternatives by using expected inputs and then altering them before a decision is made is:

sensitivity analysis.

Exponential smoothing is a

statistical method that is useful as a sales forecasting technique.

The four components of time series data are secular trend, cyclical variation, seasonality, and random variation. The seasonality in the data can be removed by:

taking the weighted average over four time periods.

Cyclical fluctuations, random variations, seasonal variations, and secular trend are all components of:

time series analysis.

Queuing theory relates

to the balancing of the cost of waiting with the cost of service; for example, the cost of lost sales resulting from long lines at the cash register versus the cost of opening another cash register.

To determine the best cost driver of warranty costs relating to glass breakage during shipments, Wymer Co. used simple linear regression analysis to study the relationship between warranty costs and each of the following variables: type of packaging, quantity shipped, type of carrier, and distance shipped. The analysis yielded the following statistics: Standard Coefficient of Error of Independent Variable Determination Estimate -------------------- -------------- -------- Type of packaging 0.60 1.524 Quantity shipped 0.48 1.875 Type of carrier 0.45 2.149 Distance shipped 0.20 4.867 Based on these analyses, the best driver of warranty costs for glass breakage is: type of packaging. quantity shipped. type of carrier. distance shipped.

type of packaging.

The assumptions of breakeven analysis include over the relevant range:

unit revenues are linear (prices do not change). unit variable costs are unchanged (i.e., linear). total costs increase as number of units increase. fixed costs are constant (straight-line). Also, it is assumed that the product mix and technology will remain unchanged.

Breakeven analysis assumes that over the relevant range:

unit variable costs are unchanged.

Box Co. uses regression analysis to estimate the functional relationship between an independent variable (cost driver) and overhead cost. Assume that the following equation is being used: y = A + Bx What is the symbol for the independent variable?

x Linear regression with two variables takes the form y = Bx + A.

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

zero.