accruaIs Ralph's Firm has a linear eost cUlVe. There are no period costs. Production eosts (which equal the total of all product eosts) are described by the following linear mode1: TMCt = F + vqt + Et, where F > 0 and v> 0 are constants, Et - N(O;a~, i.e., is an iid zero mean Normal error term, and qt is production in period t. The one catch is that production in period t must be aged, and is not sold until period t + 1.

Thus, sales in period t + 1 always equals qt, production in period t; and eost incurred in period t is given by F + vqt + Et'

a] Suppose Ralph's Firm uses actual, full eostingo What product eost will be expensed in period t?

b] Suppose Ralph's Firm uses standard, variable costing (with budgeted eost ofF

+ vqt in period t). What product eost will be expensed in period t?

c] Suppose Ralph' s Firm uses standard, full costing (with a standard produet eost of F/N + v). What product eost will be expensed in period t?

d] Suppose Ralph's Firm uses standard, variable eosting, as in [b] aboveo Further suppose we see the Firm's ineome statements forperiods t = 2, ... , n and regress total expense on quantity sold. Do we wind up with biased estimators of F and v? Carefully explain your answer.

AppendixLO1