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

Exercise 24

Curry Rubber manufactures rubber bands for commercial retail companies. The accounting manager has created a regression analysis of past data. You notice that the formula has an R-squared of .6, a t value of 2.3, and a standard error of the estimate of $200,000. The estimate for next quarter costs is $2,584,072. What do these statistics tell you about the reliability of his regression analysis?

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