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

Exercise 44

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 Based on the data derived from the regression analysis, 420 maintenance hours in a month mean that maintenance costs should be budgeted to the nearest dollar at

a. $3,780

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b. $3,461

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c. $3,797

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d. $3,746

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e. None of the above

Step 1 of 2

Regression analysis:

Regression analysis means using of cost dependent variable and cost drivers statistically to estimate the cost function. It relates the unit change in cost driver(s) with average change in dependent variable. The dependent variable is the main cost object. Regression analysis gives a fixed cost figure that is constant known as ‘a (intercept)’ and a per unit figure that changes with change in units known as ‘b coefficient’.