A Wheat Farmer Who Must Purchase His Inputs Now but Will

question 65

Multiple Choice

A wheat farmer who must purchase his inputs now but will sell his wheat at a market price at a future date:

• A)Faces a market risk that cannot be offset.
• B)Is a good example of what the chapter refers to as a speculator.
• C)Would hedge by taking the short position in a wheat futures contract.
• D)Would hedge by taking the long position in a wheat futures contract.

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Definitions:

Standard Direct Materials

The predetermined cost and quantity of raw materials expected to be used in the production process, used for budgeting and performance evaluation.

Fixed Factory Overhead Volume Variance

The difference between the budgeted and actual fixed overhead costs, due to variations in production levels.

Variable Factory Overhead Controllable Variance

The difference between the actual variable overhead costs incurred and the expected costs based on the standards set for the production volume.

Total Factory Overhead Cost Variance

The difference between the actual overhead costs incurred and the standard overhead costs assigned to production over a given period.