What Should Managers Do If They Use Sensitivity Analysis and They

question 57

Essay

What should managers do if they use sensitivity analysis and they detect small declines in operating income? What could happen if direct material prices increase by 6% and the selling prices decline in the next year?

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Definitions:

Overapplied Manufacturing Overhead

Occurs when the allocated amount for manufacturing overhead costs exceeds the actual overhead costs incurred.

Raw Materials

Raw materials are the basic, unprocessed inputs used in the manufacturing of goods, including items like minerals, chemicals, or agricultural products essential for production processes.

Factory Overhead Applied

The allocation of all indirect costs of manufacturing to the actual production, aiding in the determination of the total cost of production.

Predetermined Factory Overhead Rate

The rate used to apply factory overhead costs to the goods manufactured. The rate is determined by dividing the budgeted overhead cost by the estimated activity usage at the beginning of the fiscal period.