Questions and Answers of Managerial Of Accounting Information

3. We insisted in notationally describing the firm’s cost curve with C(q; P)as opposed to simply C(q). Explain.
4. Return to Example 2.1. Let q = 7 units. Plot all combinations of the two factors that will support production of the 7 units. Limit the first factor to 1 ≤ z1 ≤ 40. Repeat this for q = 9
5. construction of cost function Return to the setting of Example 2.6, where technology is specified by q ≤ √z1z2. Now, however, assume the factor prices are P1 = 2 and P2 = 32.(a) Initially
6. long-run cost function Ralph’s firm produces a single product. Its long-run cost function is given by C(q; P) = 900q − 40q2 + q3.(a) Determine Ralph’s total cost, average cost, marginal cost
7. short-run cost function This is a continuation of problem 6 above. Ralph’s short-run cost curve is given by CSR(q; P) = 1, 200 + 860q − 45q2 + 1.2q3.(a) Determine Ralph’s fixed, total
8. short-run cost function Return to the setting of problems 6 and 7 above. The short-run cost curve depicts a case where some factors of production have been fixed at their levels at the efficient
9. monopolist’s output This is a continuation of problem 6 above, where we focused on the long-run cost curve. Suppose Ralph is a monopolist. The market price, as a function of the quantity placed
10. construction of cost function Ralph must select the best combination of four factors of production, denoted z1 ≥ 0, z2 ≥ 0, z3 ≥ 0 and z4 ≥ 0, to produce q units of output.Technical
11. optimal plan without cost Ralph has a one product firm that uses two factors of production to make some good or service. Call the two factors capital, denoted K ≥ 0, and labor, denoted L ≥ 0.
12. optimal plan with cost This is a continuation of the immediately above problem. Now, however, we decompose Ralph’s choice into a cost exercise followed by a quantity exercise.(a) Determine
1. Present value is a key concept in linking the idea of a multiperiod firm with that of a multiproduct firm. Explain.
2. Why, in general, is average cost not defined, not meaningful, in a multiproduct setting?
3. Suppose a firm produces two products. This might be two distinct products, produced in a one-period setting. It also might be the same commodity produced in two different periods. In this sense
4. Return to the setting of Example 3.1. What is the marginal cost of each product, given production is taking place at the optimal, profit maximizing solution. Comment on your findings.
5. In example 3.6 we calculated the firm’s cost, given its production plan, as C(q, P) = 75 +4 3q2 1 + q2 2 = 75 +4 3(225) + 625 = 1, 000 Is the firm’s fixed cost 75? Explain.
6. prices and present value Suppose the interest rate is r = 10%. What is the current price, at time t = 0, of a promise to deliver 1, 000 at the end of period 3? What would the price of this promise
7. present value Ralph is practicing present value mechanics. For this purpose, the following cash inflows are assumed. Each cash inflow occurs at the end of the indicated year.Whatever interest rate
8. marginal cost Return to Example 3.1 but assume the price of the first product is P1 = 10. If the second product is not present, what is the firm’s optimal output of this product? Conversely, if
9. marginal cost Glance back at Figure 3.4 where consumption of the first factor varies with the price of the second factor, even though the two factors are used exclusively in the production of
10. cost in a multiproduct firm15 Ralph is toying with concepts of cost. A two product firm, with quantities denoted q1and q2, is being studied. Three distinct cost functions are being explored: (1)
11. timing Return to Examples 3.5 and 3.6. Now suppose all factor payments and collections from customers take place at the end of the second period. Determine the spot prices such that the firm’s
12. interest rate Return (again) to Examples 3.5 and 3.6. Now assume the same spot prices but that the interest rate is r = 18%. Determine an optimal plan, the firm’s cost of producing the optimal
13. multiproduct firm Ralph uses three inputs (denoted z1 ≥ 0, z2 ≥ 0 and z3 ≥ 0) to produce two products (denoted q1 and q2). Respective factor prices are P1 = 1,P2 = 5 and P3 = 2. Technology
14. multiproduct firm Ralph has grown up and now manages a two product firm. The technology requires a mixture of capital and labor to produce each product. Capital is shared, while labor is specific
15. multiperiod firm Return to problem 14 above. Now assume this is a multiperiod setting, as in Exhibit 3.2. Further assume the interest rate is r = 10%.Spot factor prices are 100 per unit for
1. Carefully contrast the concepts of economic income, economic rent, and accounting income.
2. In the story beginning with Tables 4.1 and 4.2, the firm’s income totals R − C(q; P). We also claim this is the firm’s net cash flow.Explain.
3. In our multiperiod setting (e.g., Table 4.8), it turns out that over the two periods, cash flow, economic income and accounting income agree with one another. Verify this claim. Explain.
4. Define period and product cost pools. When is a period cost expensed? When is a product cost expensed? What does the economic theory of the firm say about the distinction between period and
5. Carefully contrast a product’s marginal cost with its unit cost.
6. Are the factor consumptions reflected in a direct cost pool independent of the price of other factors or, for that matter, of the quantity of other products produced? Explain
7. Return to Tables 4.3 and 4.4. What is the cost of goods sold total for each of the products in each of the tables. Explain.
8. product versus period cost Suppose pool #3 in Table 4.7 is designated a period cost pool. Redo the income displays in Table 4.8. Explain your finding.
9. marginal versus unit cost Ralph manages a two product firm. The technology requires a mixture of capital and labor to produce each product. Capital is shared,while labor is specific to each of the
10. accounting versus economic income Return to the setting of Example 4.2, but now assume the firm must pay, at time t = 0, a franchise fee of 850 in order to legally produce and sell its products.
11. accounting versus economic valuation Ralph is pondering the difference between economic and accounting descriptions of financial life. Provide three explicit examples, one where a good guess is
12. accounting expense versus economic cost Paton states "...the accountant’s ’expense’ for the particular business and the economist’s ’cost of production’ are two quite different
13. accounting income We often see cases where a firm’s accounting income is reported and the price of the firm’s equity, traded on an organized exchange, behaves in seemingly strange fashion.
14. accounting versus economic history Ralph forms a firm by investing 1, 000 dollars. This cash is immediately paid for a machine with a useful life of 3 years. The net cash inflow from this machine
15. the accountant’s task"Accounting...might best be defined as the art which attempts to break up the financial history of a business into specific units, a year or less in length. In other words,
16. accounting versus economic history Ralph has designed a consumer product, and launched a manufacturing and sales organization. To keep the problem uncluttered, the firm has a life of exactly
1. The cost construction illustration in Table 5.1 treats interest but not dividends as a cost. Give one set of circumstances in which dividends would not be treated as a component of economic cost
2. Add another cost pool to the list in Table 5.1: employee bonuses, with a total of 95, 000. This total was paid to employees early in the year, based on their and the firm’s performance in the
3. A major university has launched a pollution reduction campaign that, among other things, will tally miles flown by employees on commercial carriers, presumably to "cost" each such mile in terms of
4. Return to Example 5.2, where we explored treating the third pool as a period or a product cost pool. Can you find an LLA and allocation scheme for the third pool that makes the resulting unit cost
5. A so-called "step cost" arises when some factor of production is acquired in specific, integer units. To illustrate, it might be possible to lease machine time at the rate of 5, 000 per unit,
6. product costing Return to the product cost construction illustration in Table 5.1.Numerous assumptions were used in the costing exercise, reflecting period versus product cost distinctions and the
7. product costing Various nonprofit organizations report the total funds raised, the amount spent on various social services, and the amount spent on administration and fund raising. We might think
8. long-run marginal cost Suppose Ralph has a single product firm with long-run economic cost given by C(q; P) = 300q − 20q2 + q3.(a) Suppose q = 10 units are produced. What total cost will be
9. long-run versus short-run economic cost Suppose Ralph’s long-run economic cost curve is again given by C(q; P) = 300q − 20q2 + q3 where q denotes output in this conveniently single product
10. accounting LLA Return to the above problem dealing with Ralph’s cost curve. Now suppose Ralph’s accountant approximates CSR(q; P) with an LLA of CSR(q; P) ≅ a +bq. Further suppose the
11. accounting LLA Repeat the LLA construction in problem 10 above, but with the"anchoring point" at q = 12. (So you want the LLA to agree with CSR(12; P) and its slope to equal marginal cost at q =
12. product costing Ralph’s Service provides consulting expertise to not-for-profit entities.Several partners lead various consulting teams that provide the services on a contract basis. Each team
13. product costing Ralph’s Firm manufactures and sells two products, code named A and B. The manufacturing process is relatively simple, with each product passing through the same set of machines
14. unit costs Ralph manufactures two products. Total manufacturing cost (TMC)is described by an LLA of TMC = 40, 000 + 10q1 + 5q2, where qi denotes units of product i.(a) Ralph is contemplating two
1. The accounting library uses aggregation, LLAs and cost allocation in assembling and presenting cost information. Carefully discuss the connection among these building blocks and the product cost
2. Suppose we have a single product firm. The firm uses normal, full costing with a normal volume equal to its efficient scale or output level(where average economic cost is a minimum). The LLA is
3. Assume in our extended illustration (Ralph’s Venture) that both products are sold, with the selling price for the second being 250.Redo Tables 6.4, 6.7 and 6.10. Explain the pattern that emerges.
4. Suppose a firm tends to hold its production constant, and uses inventory to buffer the effects of random demand. (So it depletes inventory in good times and builds inventory in bad times.) Will
5. overhead pools Return again to the extended illustration (Ralph’s Venture), but now assume all overhead is aggregated into a single pool with LLA estimated by OV = 60 + 3 · DL$. Redo Table
6. unit costs Ralph is dealing with two products, with respective quantities denoted q1 and q2. The cost structure is described by the following LLAs:direct labor: DL = 400q1 + 700q2 direct material:
7. standard costs Return yet again to the extended illustration, but now assume a standard cost system is in use. The LLAs for the two overhead pools remain as originally specified. The standard (the
8. actual, full costing Return to problem 3−14 where Ralph manages a two product firm.Demand now limits him to producing q1 = 100 units of the first product and q2 = 150 units of the second. Labor
9. allocation of overhead plug to cost of goods sold Simple Manufacturing Company manufactures and distributes a single product. It records manufacturing costs using a normal, full costing system
10. normal, full costing and income effects Ralph produces and sells a wide variety of products. A new product proposal is under review. The tentative plan calls for production of 100 units of this
11. normal, variable costing and income effects Redo problem 10 above on the assumption normal, variable costing is used. Explain your finding.
12. actual versus normal costing Return to the setting of Ralph’s Firm, problem 13 in Chapter 5. After reflection and analysis, Ralph concludes that total manufacturing overhead (OV ) is best
13. unit costs Ralph is exploring his understanding of various product costing models.For this purpose he envisions a single product firm, along with three cost pools: direct labor, direct material,
14. incremental effects Ralph is considering whether to respond to a customer’s appeal for production of a special product. The offered price is 6, 000 and Ralph estimates incremental direct labor
15. comparison of methods Ralph’s Job deals with a small custom fabricator of display cabinets.The accounting system separately accumulates direct labor cost, direct material cost, and two overhead
16. variable versus full costing, income effects Consider a single product firm with the following LLAs, where q denotes units manufactured and selling and administrative is, of course, a period
17. full costing Ralph’s Venture finds Ralph in a startup company. Ralph has prepared a business plan and a venture capitalist has agreed to provide the necessary funds. Ralph’s business plan
1. How much, in Example 7.1, should Sally pay for dinner?
2. Our comparison of the impressionism and modernism schools stressed estimation of marginal cost. Is this an appropriate focus of comparison? Explain.
3. We have stressed the role of presumptive separability in both the impressionism and modernism schools. What is meant by separability, and how does lack of separability lead to error in the unit
4. A popular claim is that the modernism school provides more accurate unit cost measures because it concentrates on cause and effect relationships, well thought out synthetic variables, as opposed
5. managerial implications Suppose you encounter a setting such as Example 7.2 where a highly aggregate, impressionism approach is in place and it appears most of the firm’s profit is due to one of
6. no difference Given a specific numerical version of the prices and technology in(7.3) such that the impressionism and modernism schools report the same unit costs, and thus perfectly estimate
7. changing technology Return to the setting of Example 7.3 and Tables 7.7, 7.8 and 7.9.Now parameterize the direct labor cost by γ ·140 for the first product and γ · 90 for the second product.
8. unit versus marginal cost Return to Example 7.3 and focus on the constant returns to scale case of α = β = .5. Determine total cost, marginal cost of each product, unit cost of each product
9. unit versus marginal cost Repeat the above for the mixed case of α = .55 and β = .45.
10. unit versus marginal cost Repeat the above for the mixed case of α = .45 and β = .55. Explain whatever differences you see in the error patterns here versus in the above 2 exercises.
11. unit versus marginal cost Return to problem 3-14, but now assume Ralph wants to produce q1 = 100 and q2 = 200.(a) Determine Ralph’s best combination of capital and labor, as well as the total
12. shadow prices Return to Example 7.3. Determine, using program (7.3), the optimal factor consumptions to produce the noted output of q = [7, 9]. Also determine the shadow prices for each
13. shadow prices This is a continuation of problem 12 above. Using your shadow prices and factor choices, verify that all of the constraints in (7.3) are satisfied, as well as all of the first order
14. second best Suppose we want to maximize f(x, y, z) = 6x − x2 + 9y − y2 + 5z − z2 − θxyz, subject to x, y, z ≥ 0.(a) Let θ = 1. Determine the values of x, y and z that maximize f(x, y,
1. What does it mean when we say consistency is the central feature of economic rationality? Might an individual characterized by undivided pursuit of wealth be economically rational? Might an
2. The three principles of consistent framing were presented in terms of locating an element in a given set, a ∈ A, that make a given criterion function, ω(a), as large as possible. Carefully
3. nonlinear shadow price Return to our discussion of shadow prices, and the maximization in(8.2). Now suppose the criterion function is ω(x, y) = 10x2 + 12y2.Determine an optimal solution, along
4. shadow price under component search In Example 8.3 we worked through a reduced dimensionality version of Example 2.6. An important constraint is the requirement z1 ≤ 15.Determine the shadow
5. increasing transformations Suppose we want to maximize ω(a) = 12a−a2, over 0 ≤ a ≤ 8. Why does the first principle of consistent framing apply to transforming the entire function and not
6. incremental analysis Suppose a firm seeks to maximize its profit. It is presently producing and selling q units. It has an opportunity to produce and sell q + 1 units. Carefully explain the use
7. opportunity cost Suppose you are going to the movie. The choices are a mystery, a high adventure story, a musical, or a documentary. Further suppose you absolutely cannot stand musicals. Use the
8. opportunity cost A retailer often frames a product stocking and placement decision by thinking (and analyzing) in terms of the opportunity cost per unit of shelf space. Is this a proper
9. shadow prices We find Ralph studying cost, and how cost depends on the way a choice problem is framed. Ralph now produces two products. Let x and y, respectively, denote the quantities of the two
10. component searches and product cost Return to problem 9 above. Now suppose Ralph likes to think in terms of how many units of the first product, x, to produce and sell.Clearly we require 0 ≤ x
11. combinations of the framing principles Suppose we want to maximize ω(x, y) = 12x − x2 + 18y − 3y2 − 10, subject to x+y ≤ 8, x ≥ 0 and y ≥ 0. You should verify the solution has x =
12. framing and approximations This problem works through a sequence of framing exercises.(a) Ralph produces a single product, with quantity denoted x. Profit is given by the expression x(10−.5x),
13. decision making Consider a three product firm facing a constrained linear technology.The firm is organized into two departments, machining and assembly.Machine hours are constraining in the first
14. decision making with interactions Ralph is now managing a firm with interdependent service centers.Two such centers are involved, say, power and maintenance. For each such center, 80% of total

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