Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 23

Jamison Construction has implemented a cost estimation system using a regression analysis. The variable cost per hour of labor is $35 and the fixed cost was determined to be $125,000. If Jamison projects it will be working 200,000 hours in 2010, what is the projected total cost?

Step 1 of 2

Regression Analysis:

The statistical method which helps to obtain the unique equation relating to the cost estimate on the basis of the data points set. In the regression analysis the sum of the squares of the estimation errors is to be minimized. The error represents the distance which is obtained by measuring the regression line and data point difference.

There is a dependent variable and independent variable in the regression analysis. The cost which is to be estimated is the dependent variable. The cost driver which is used for estimating the dependent variable amount is the independent variable.

The cost is computed as:

Here:

Y = Total Costs to be estimated (dependent variable)

a = Fixed costs

b = Variable cost per unit

X = Cost driver (independent variable)

e = Estimation error