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

Exercise 43

Regression Analysis Problems 8-42 through 8-46 are based on Armer Company, which is accumulating data to use in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested the use of linear regression to derive an equation for maintenance hours and costs. Data regarding the maintenance hours and costs for the last year and the results of the regression analysis follow:

	Hours of Activity	Maintenance Costs
January	480	$ 4,200
February	320	3,000
March	400	3,600
April	300	2,820
May	500	4,350
June	310	2,960
July	320	3,030
August	520	4,470
September	490	4,260
October	470	4,050
November	350	3,300
December	340	3,160
Total	4,800	$43,200
Average	400	3,600

 

Average cost per hour ($43,200/4,800) = $9.00
a (intercept)	684.65
b coefficient	7.2884
Standard error of the estimate	34.469
R-squared	.99724
t-value for b	60.105

Required If Armer Company uses the high-low method of analysis, the equation for the relationship between hours of activity and maintenance cost follows:

a. y = 400 + 9.0x

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b. y = 570 + 7.5x

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c. y = 3,600 + 400x

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d. y = 570 + 9.0x

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e. None of the above

Step 1 of 2

Cost estimation:

Cost estimation means defining a relation between the cost object and its cost driver in order to predict the cost. This cost estimation is used in various management functions such as product and service costing, planning and decision making, operational control and strategic decision making.