When Forecasting Income Statements, Which of the Following Is Generally

question 15

Multiple Choice

When forecasting income statements, which of the following is generally a key assumption firms make about their variable operating costs?

• A)Variable operating costs remain the same each year.
• B)Variable operating costs increase at the same rate as sales.
• C)Variable operating costs are forecast to be the average of the operating costs during the previous three years.
• D)Variable operating costs decrease when sales increase.
• E)Variable operating costs are set at industry averages.

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Definitions:

Direct Materials

Raw materials that are directly traceable to the production of specific goods or services and are significant in terms of cost.

Manufacturing Overhead

Refers to all the indirect costs associated with manufacturing, not directly tied to a specific product, such as factory rent or maintenance.

Predetermined Overhead Rate

A rate used to allocate manufacturing overhead to individual products or job orders, calculated before the period begins based on estimated costs and activity levels.

Manufacturing Overhead

Indirect costs related to the production process, such as factory rent, utilities, and maintenance, which are not directly tied to specific units produced.