An organisation's accountant is estimating next period's total overhead costs. She performed two regression analyses, one based on direct labour hours and the other based upon machine hours. The results were: Total overhead = $150,000 + $4 x direct labour hours
Adjusted R-square = 0.83
Total overhead = $130,000 + $5 x machine hours
Adjusted R-square = 0.77
For the next period the accountant anticipates using 28,000 direct labour hours and 26,000 machine hours. Based upon this information, what is the best estimate for overhead for the next period?
A) $262,000
B) $260,000
C) $254,000
D) $270,000

Question

Quizplus · Accepted Answer

The best estimate for overhead for the next period is calculated using the regression analysis with the higher adjusted R-square value, as it indicates a better fit of the model to the data. The regression analysis based on direct labour hours has a higher adjusted R-square (0.83) compared to the one based on machine hours (0.77). Therefore, we use the first regression equation: Total overhead = $150,000 + $4 x direct labour hours. Substituting 28,000 for direct labour hours gives: Total overhead = $150,000 + $4 x 28,000 = $150,000 + $112,000 = $262,000.

An Organisation's Accountant Is Estimating Next Period's Total Overhead Costs