The User of a Commodity Who Is Trying to Insure

question 26

Multiple Choice

The user of a commodity who is trying to insure against the price of the commodity rising would:

• A) take the short position in a futures contract.
• B) take the long position in a futures contract.
• C) be better off speculating on price movements and earning higher profits.
• D) want to hedge by selling a futures contract.

---

Definitions:

Absorption Costing

Absorption costing is an inventory valuation method that incorporates all costs associated with manufacturing, including direct materials, direct labor, and all manufacturing overhead expenses, both variable and fixed, into the product cost.

Variable Costing

A costing method that includes only variable production costs—direct materials, direct labor, and variable manufacturing overhead—in unit product cost.

Management

The process of planning, organizing, leading, and controlling an organization's resources to achieve specific goals.

Variable Costing

A costing method that includes only variable costs—direct materials, direct labor, and variable manufacturing overhead—in the cost of a unit of production, excluding fixed overhead.