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DISCUSSION QUESTIONS
Q3-1.
Q3-2.
Q3-3.
Q3-4.
The total dollar amount of a fixed cost is constant at different levels of activity within the
relevant range, but fixed cost per unit of activity varies. In contrast, the total amount of a
variable cost varies at different levels of activity, but the variable cost per unit remains constant within the relevant range. A semivariable
cost contains both fixed and variable elements. Consequently, both total semivariable
cost and semivariable cost per unit vary with
changes in activity.
The relevant range is the range of activity
over which a fixed cost remains constant in
total or a variable cost remains constant per
unit of activity. The underlying assumptions
about the relationship of the activity and the
incurrence of cost change outside the relevant range of activity. Consequently, the
amount of fixed cost or the variable cost rate
must be recomputed for activity above or
below the relevant range.
The fixed and variable components of a semivariable cost should be segregated in order to
plan, analyze, control, measure, and evaluate
costs at different levels of activity. Separation
of the fixed and variable components of semivariable cost is necessary to:
(a) compute predetermined factory overhead
rates and analyze variances;
(b) prepare flexible budgets and analyze variances;
(c) analyze direct cost and the contribution
margin;
(d) determine the break-even point and analyze the effect of volume on cost and
profit;
(e) compute differential cost and make comparative cost analyses;
(f) maximize short-run profits and minimize
short-run costs;
(g) budget capital expenditures;
(h) analyze marketing profitability by territories, products, and customers.
The obvious advantage to using managerial
judgement to separate fixed and variable
3-1
Q3-5.
Q3-6.
Q3-7.
3-2
Q3-8.
Q3-9.
Chapter 3
good fit. A standard error of zero would indicate a perfect fit, i.e., all actual observations
would be on the regression fine.
Q3-10. Heteroscedasticity means that the distribution
of observations around the regression line is
not uniform for all values of the independent
variable. If heteroscedasticity is present, the
standard error of the estimate and confidence
interval estimates, based on the standard
error, are unreliable measures.
Q3-11. Serial correlation means that rather than
being random, the observations around the
regression line are correlated with one
another. If serial correlation is present, the
standard error of the estimate and confidence
interval estimates, based on the standard
error, are unreliable measures.
Q3-12. Multicollinearity means that two or more of
the independent variables in a multiple
regression analysis are correlated with one
another. When the degree of multicollinearity
is high, the relationship between one or more
of the correlated independent variables and
the dependent variable may be obscured.
However, this circumstance would normally
not affect the estimate of cost.
Chapter 3
3-3
EXERCISES
E3-1
Activity Level
High............................................ 2,600 hours
Low............................................. 2,100
Difference ..................................
500 hours
Cost
$1,300
1,100
$ 200
Variable rate: $200 500 machine hours = $.40 per machine hour
High
$1,300
Low
$1,100
840
$ 260
E3-2
$1,000
$900
SUPPLIES COST
$800
$700
$600
$500
$400
$300
$200
$100
$0
0
200
400
600
$757.50
350.00
$407.50
800
3-4
Chapter 3
E3-3
( x i x )(y i y ) 87, 000
=
= $60
( x i x )2
1, 450
a = y bx = $10,000 ($60 125) = $2,500
Travel and entertainment expense for 200 sales calls would be:
yi = a + bxi = $2,500 + ($60 200 calls) = $14,500
b=
E3-4
(1)
y
Electricity
Cost
Month
January...... $1,600
February .... 1,510
March ......... 1,500
April ........... 1,450
May............. 1,460
June ........... 1,520
July ............ 1,570
August ....... 1,530
September . 1,480
October...... 1,470
November .. 1,450
December .. 1,460
Total
$18,000
(2)
)
(y y
Cost
Deviation
100
10
0
(50)
(40)
20
70
30
(20)
(30)
(50)
(40)
0
(3)
x
Machine
Hours
2,790
2,680
2,600
2,500
2,510
2,610
2,750
2,700
2,530
2,520
2,490
2,520
31,200
(4)
(x x)
Activity
Deviation
190
80
0
(100)
(90)
10
150
100
(70)
(80)
(110)
(80)
0
(5)
(x x)2
(6)
)
(x x )(y y
(4) Squared
36,100
6,400
0
10,000
8,100
100
22,500
10,000
4,900
6,400
12,100
6,400
123,000
(4) (2)
19,000
800
0
5,000
3,600
200
10,500
3,000
1,400
2,400
5,500
3,200
54,600
y = y = n = $18,000 12 = $1,500
x = x = n = 31,200 12 = 2,600
54, 600
( x x )(y y ) Column 6 total
=
= $.44
=
2
( x x )
Column 5 total 123, 000
bx
Fixed cost (a) = y
= $1,500 ($.44)(2,600)
= $356
Variable rate (b ) =
Chapter 3
3-5
E3-5
r=
( x i x )(y i y )
( x i x )2 (y i y )2
1, 564
(850) (3, 400)
= .92
r 2 = (.92)2 .8464
E3-6
(1)
y
Shipping
Month
Expense
January ..... $ 560
February....
600
March ........
600
April...........
580
May ............
570
June...........
550
July ............
590
August.......
610
September
650
October .....
620
November .
630
December..
640
Total....... $7,200
(2)
)
(y y
Expense
Deviations
(40)
0
0
(20)
(30)
(50)
(10)
10
50
20
30
40
0
(3)
x
Sales
Revenue
$26,500
30,000
29,000
28,000
27,000
25,500
30,000
33,000
35,000
32,000
30,500
33,500
$360,000
(4)
(x x)
Activity
Deviations
(3,500)
0
(1,000)
(2,000)
(3,000)
(4,500)
0
3,000
5,000
2,000
500
3,500
0
(5)
(x x)2
(6)
)
(x x)(y y
(7)
)2
(y y
(4) Squared
12,250,000
0
1,000,000
4,000,000
9,000,000
20,250,000
0
9,000,000
25,000,000
4,000,000
250,000
12,250,000
(4) (2)
140,000
0
0
40,000
90,000
225,000
0
30,000
250,000
40,000
15,000
140,000
(2) Squared
1,600
0
0
400
900
2,500
100
100
2,500
400
900
1,600
97,000,000
970,000
11,000
3-6
Chapter 3
E3-7
(1)
r=
( x i x )(y i y )
( x i x )2 (y i y )2
2, 400
= .96
(6, 250) (1, 000)
r 2 = (.96)2 = .9216
(2)
(3)
b=
( x i x )(y i y ) 2, 400
variable maintenance
=
= $.384
2
cost
per machine ho
our
( x i x )
6, 250
E3-8
(1)
( x i x )(y i y )
( x i x ) (y i y )
2
5, 700
5, 700
= .9497
=
(28, 500) (1, 264 ) 6, 002
r 2 = (.9497 )2 = .9019
(2)
( x i x )(y i y )
( x i x )2 (y i y )2
7, 000
7, 000
= .8805
=
(50, 000) (1, 264 ) 7, 950
r 2 = (.8805)2 = .7753
(3)
In this case, direct labor hours should be chosen as the appropriate activity
measure to be used in predicting electricity cost because the coefficient of
determination (r2 = .9019) is higher than that for machine hours (r2 = .7753).
Chapter 3
3-7
E3-8 (Concluded)
(4)
b=
( x i x )(y i y )
5, 700
variable ellectricity
=
= $.20
2
cost rate
( x i x )
28, 500
s=
Labor
Hours
2,650
3,000
2,900
2,800
2,700
2,550
3,000
3,300
3,500
3,200
3,050
3,350
36,000
(2)
yi
Actual
Utility
Cost
$ 3,600
4,000
4,000
3,800
3,700
3,500
3,900
4,100
4,500
4,200
4,300
4,400
$48,000
(3)
(4)
(5)
(yi = a + bxi) (yi yi)
(yi yi)2
Predicted Prediction
Utility
Error
(4)
Cost
(2) (3)
Squared
$ 3,650
(50)
$2,500
4,000
0
0
3,900
100
10,000
3,800
0
0
3,700
0
0
3,550
(50)
2,500
4,000
(100)
10,000
4,300
(200)
40,000
4,500
0
0
4,200
0
0
4,050
250
62,500
4,350
50
2,500
$48,000
0
$130,000
(y i y i )2
Column 5 total
$130, 000
=
=
= $114.018
12 2
10
n 2
3-8
Chapter 3
E3-10
s=
(y i y i )2
$49, 972
=
= 3, 844 = $62
15 2
n 2
( x i x )2
1
+
n ( x i x )2
$500 (1.771)($62) 1+
Chapter 3
3-9
PROBLEMS
P3-1
(1)
Month
January............
February ..........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........
Total
r=
r=
r=
(2)
)
(y y
Expense
Deviations
(3)
x
Calls
Made
$ 3,000
3,200
2,800
3,400
3,100
3,200
2,900
3,300
3,500
3,400
3,200
3,400
(200)
0
(400)
200
(100)
0
(300)
100
300
200
0
200
410
420
380
460
430
450
390
470
480
490
440
460
$38,400
5,280
( x i x )(y i y )
( x i x )2 (y i y )2
(4)
(x x)
Activity
Deviations
(30)
(20)
(60)
20
(10)
10
(50)
30
40
50
0
20
r 2 = .8957
(6)
)
(x x )(y y
(7)
)2
(y y
(4) Squared
(4) (2)
(2) Squared
900
400
3,600
400
100
100
2,500
900
1,600
2,500
0
400
6,000
0
24,000
4,000
1,000
0
15,000
3,000
12,000
10,000
0
4,000
40,000
0
160,000
40,000
10,000
0
90,000
10,000
90,000
40,000
0
40,000
13,400
79,000
520,000
Column 6 total
(Column 5 total) (Column 7 total)
79, 000
79, 000
=
00
(13, 400)(520, 000)
6, 968, 000, 00
79, 000
= .9464
83, 475
(5)
(x x)2
3-10
Chapter 3
P3-1 (Concluded)
(b)
Month
January............
February .........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........
(1)
y
Travel
Expense
$ 3,000
3,200
2,800
3,400
3,100
3,200
2,900
3,300
3,500
3,400
3,200
3,400
Total ............
$38,400
r=
=
=
(2)
(3)
(4)
(y y )
x
(x x)
Expense
Orders
Activity
Deviations Received Deviations
(200)
$53,000 (13,000)
0
65,000
(1,000)
(400)
48,000 (18,000)
200
73,000
7,000
(100)
62,000
(4,000)
0
67,000
1,000
(300)
60,000
(6,000)
100
76,000
10,000
300
82,000
16,000
200
62,000
(4,000)
0
64,000
(2,000)
200
80,000
14,000
0
$792,000
( x i x )(y i y )
( x i x ) (y i y )
2
(5)
(x x)2
(4) Squared
169,000,000
1,000,000
324,000,000
49,000,000
16,000,000
1,000,000
36,000,000
100,000,000
256,000,000
16,000,000
4,000,000
196,000,000
1,168,000,000
(6)
(7)
)2
(x x )(y y ) (y y
(4) (2) (2) Squared
2,600,000
40,000
0
0
7,200,000 160,000
1,400,000
40,000
400,000
10,000
0
0
1,800,000
90,000
1,000,000
10,000
4,800,000
90,000
(800,000) 40,000
0
0
2,800,000
40,000
21,200,000
520,000
Column 6 total
(Column 5 total) (Column 7 total)
r 2 = .7399
(2)
Chapter 3
3-11
P3-2
(1)
Month
January............
February ..........
March ...............
April ................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........
(1)
y
Supplies
Cost
$ 1,505
1,395
1,565
1,515
1,445
1,415
1,465
1,505
1,575
1,535
1,500
1,580
(2)
)
(y y
Cost
Deviations
5
(105)
65
15
(55)
(85)
(35)
5
75
35
0
80
(3)
x
Labor
Hours
5,000
4,600
5,160
5,100
4,830
4,750
4,900
5,080
5,200
5,130
4,950
5,300
60,000
(4)
(x x)
Activity
Deviations
0
(400)
160
100
(170)
(250)
(100)
80
200
130
(50)
300
0
(5)
(x x)2
(4) Squared
0
160,000
25,600
10,000
28,900
62,500
10,000
6,400
40,000
16,900
2,500
90,000
452,800
( x x )(y y )
( x x )2 (y y )2
r 2 = (.977 )2 = .955
131, 950
= .977
(452, 800) (40, 250)
(6)
(7)
)2
(x x )(y y ) (y y
(4) (2)
0
42,000
10,400
1,500
9,350
21,250
3,500
400
15,000
4,550
0
24,000
131,950
(2) Squared
25
11,025
4,225
225
3,025
7,225
1,225
25
5,625
1,225
0
6,400
40,250
3-12
Chapter 3
P3-2 (Concluded)
Month
January............
February ..........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........
(1)
y
Supplies
Cost
$ 1,505
1,395
1,565
1,515
1,445
1,415
1,465
1,505
1,575
1,535
1,500
1,580
(2)
)
(y y
Cost
Deviations
5
(105)
65
15
(55)
(85)
(35)
5
75
35
0
80
(3)
(4)
x
(x x)
Machine Activity
Hours Deviations
2,000
(50)
1,990
(60)
2,140
90
2,080
30
1,960
(90)
1,940
(110)
2,020
(30)
1,990
(60)
2,140
90
2,050
0
2,030
(20)
2,260
210
24,600
(5)
(x x)2
(4) Squared
2,500
3,600
8,100
900
8,100
12,100
900
3,600
8,100
0
400
44,100
92,400
(6)
(7)
) (y y)2
(x x)(y y
(4) (2)
(250)
6,300
5,850
450
4,950
9,350
1,050
(300)
6,750
0
0
16,800
(2) Squared
25
11,025
4,225
225
3,025
7,225
1,225
25
5,625
1,225
0
6,400
50,950
40,250
(2)
Since the coefficient of determination for supplies cost and labor hours (r 2 = .955)
is greater than the coefficient of determination for supplies cost and machine
hours (r 2 = .697), labor hours should be used as the basis for estimating supplies
cost. Labor hours explain more of the variance in supplies cost than do machine
hours.
(3)
With labor hours as the basis for predicting supplies cost, the fixed cost and the
variable cost rate can be determined by the method of least squares as follows:
( x x )(y y ) Column 6 total 131, 950
=
= $.29141
=
( x x )2
Column 5 total 452, 800
= y bx
Variable rate (b ) =
Fixed cost (a )
Chapter 3
3-13
P3-3
Month
January............
February ..........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........
(1)
y
Electricity
Cost
$1,600
1,570
1,610
1,550
1,530
1,540
1,520
1,530
1,580
1,650
1,660
1,620
(2)
)
(y y
Cost
Deviations
20
(10)
30
(30)
(50)
(40)
(60)
(50)
0
70
80
40
(3)
x
Labor
Hours
4,200
4,000
4,360
4,000
4,050
4,100
4,150
4,250
4,150
4,500
4,600
4,400
50,760
(4)
(x x)
Activity
Deviations
(30)
(230)
130
(230)
(180)
(130)
(80)
20
(80)
270
370
170
0
(5)
(x x)2
(4) Squared
900
52,900
16,900
52,900
32,400
16,900
6,400
400
6,400
72,900
136,900
28,900
(4) (2)
(600)
2,300
3,900
6,900
9,000
5,200
4,800
(1,000)
0
18,900
29,600
6,800
(2) Squared
400
100
900
900
2,500
1,600
3,600
2,500
0
4,900
6,400
1,600
424,800
85,800
25,400
( x x )(y y )
( x x ) (y y )
2
r 2 = (.826)2 = .682
(6)
(7)
) (y y)2
(x x)(y y
85, 800
= .826
(424, 800) (25, 400)
3-14
Chapter 3
P3-3 (Concluded)
Month
January............
February ..........
March ..............
April .................
May ..................
June .................
July ..................
August ............
September.......
October............
November ........
December ........
(1)
y
Electricity
Cost
$1,600
1,570
1,610
1,550
1,530
1,540
1,520
1,530
1,580
1,650
1,660
1,620
(2)
)
(y y
Cost
Deviations
20
(10)
30
(30)
(50)
(40)
(60)
(50)
0
70
80
40
(3)
(4)
x
(x x)
Machine Activity
Hours Deviations
2,300
0
2,150
(150)
2,400
100
2,250
(50)
2,160
(140)
2,240
(60)
2,180
(120)
2,170
(130)
2,260
(40)
2,500
200
2,540
240
2,450
150
27,600
(5)
(x x)2
(6)
(7)
) (y y)2
(x x)(y y
(4) Squared
0
22,500
10,000
2,500
19,600
3,600
14,400
16,900
1,600
40,000
57,600
22,500
(4) (2)
0
1,500
3,000
1,500
7,000
2,400
7,200
6,500
0
14,000
19,200
6,000
(2) Squared
400
100
900
900
2,500
1,600
3,600
2,500
0
4,900
6,400
1,600
211,200
68,300
25,400
( x x )(y y )
( x x )2 (y y )2
68, 300
= .933
(211, 200) (25, 400)
r 2 = (.933)2 = .870
(2)
Since the coefficient of determination for electricity cost and machine hours
(r2 = .870) is greater than the coefficient of determination for electricity cost
and labor hours (r2 = .682), machine hours should be used as the basis for
estimating electricity cost. Machine hours explain more of the variance in
electricity cost than do labor hours.
(3)
With machine hours as the basis for predicting electricity cost, the fixed cost
and the variable cost rate can be determined by the method of least squares as
follows:
( x x )(y y ) Column 6 total 68, 300
=
= $.32339
=
( x x )2
Column 5 total 211, 200
= y bx
Variable rate (b ) =
Fixed cost (a )
Chapter 3
3-15
P3-4
(1)
High .................................................................
Low ..................................................................
Difference........................................................
Maintenance
Cost
$2,290
2,000
$ 290
Machine
Hours
2,700
2,000
700
(1)
(2)
)
yi
(yi y
Maintenance
Cost
Month
Cost
Deviations
January............ $2,200
40
February ..........
2,130
(30)
March ...............
2,000
(160)
April .................
2,170
10
May ..................
2,050
(110)
June .................
2,220
60
July ..................
2,150
(10)
August .............
2,250
90
September.......
2,290
130
October............
2,150
(10)
November ........
2,210
50
December ........
2,100
(60)
Total ........... $25,920
(3)
(4)
xi
(xi x)
Machine Activity
Hours Deviations
2,500
100
2,350
(50)
2,000
(400)
2,400
0
2,100
(300)
2,600
200
2,450
50
2,550
150
2,700
300
2,450
50
2,400
0
2,300
(100)
28,800
High
$2,290.00
1,118.57
$1,171.43
(5)
(xi x)2
(4) Squared
10,000
2,500
160,000
0
90,000
40,000
2,500
22,500
90,000
2,500
0
10,000
430,000
Low
$2,000.00
828.57
$1,171.43
(6)
(7)
)2
(xi x )(yi y ) (yi y
(4) (2)
4,000
1,500
64,000
0
33,000
12,000
(500)
13,500
39,000
(500)
0
6,000
(2) Squared
1,600
900
25,600
100
12,100
3,600
100
8,100
16,900
100
2,500
3,600
172,000
75,200
3-16
Chapter 3
P3-4 (Concluded)
(3)
r=
r=
( x x )(y y )
( x i x )2 (y i y )2
Column 6 total
olumn 7 total)
(Column 5 total) (Co
172, 000
172, 000
172, 000
=
=
= .9565
(430, 000)(75, 200)
32, 336, 000,0
000 179, 822
r 2 = (.9565)2 = .91489
(4)
(1)
xi
Month
January ..................
February ................
March .....................
April........................
May .........................
June........................
July.........................
August....................
September .............
October ..................
November ..............
December ..............
Total....................
s=
(5)
Machine
Hours
2,500
2,350
2,000
2,400
2,100
2,600
2,450
2,550
2,700
2,450
2,400
2,300
28,800
(2)
(3)
(4)
yi
(yi = a + bxi) (yi yi)
Actual
Predicted Prediction
Maintenance Maintenance
Error
Cost
Cost
(2) (3)
$2,200
$2,200
$0
2,130
2,140
(10)
2,000
2,000
0
2,170
2,160
10
2,050
2,040
10
2,220
2,240
(20)
2,150
2,180
(30)
2,250
2,220
30
2,290
2,280
10
2,150
2,180
(30)
2,210
2,160
50
2,100
2,120
(20)
$25,920
$25,920
$0
(5)
(yi yi)2
(4)
Squared
$0
100
0
100
100
400
900
900
100
900
2,500
400
$6,400
(y i y i )2
Column 5 total
$6, 400
=
=
= $25.29822
12 2
10
n 2
The 95% confidence interval for maintenance cost at the 2,500 machine hour
level of activity is
y t 95%
( x i x )2
1
s 1+ +
n ( x i x )2
Chapter 3
3-17
P3-5
(1)
(a)
(1)
yi
Month
January............
February ..........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........
Total ...........
b=
Electricity
Cost
$ 400
500
500
700
600
800
1,000
900
900
700
600
800
$8,400
(2)
)
(yi y
Difference
from
Average of
$700
Electricity
Cost
$(300)
(200)
(200)
0
(100)
100
300
200
200
0
(100)
100
0
(3)
xi
Guest
Days
1,000
1,500
2,500
3,000
2,500
4,500
6,500
6,000
5,500
3,000
2,500
3,500
(4)
(xi x)
Difference
from
Average of
3,500
Guest
Days
(2,500)
(2,000)
(1,000)
(500)
(1,000)
1,000
3,000
2,500
2,000
(500)
(1,000)
0
42,000
(5)
(xi x)2
(4) Squared
(000s
omitted)
6,250
4,000
1,000
250
1,000
1,000
9,000
6,250
4,000
250
1,000
0
34,000
(6)
(7)
) (y y)2
(xi x)(yi y
i
(4) (2)
(000s
omitted)
$ 750
400
200
0
100
100
900
500
400
0
100
0
$3,450
Since y = a + bx , then:
$700 = a + ($.1015 3, 500)
a = $700 $355
a = $345 fixed cost per month
(2)
Squared
(000s
omitted)
$ 90
40
40
0
10
10
90
40
40
0
10
10
$380
3-18
Chapter 3
P3-5 (Continued)
(b)
High ............................................................
Low.............................................................
Difference ..................................................
Guest
Days
6,500
1,000
5,500
$600
= $.1091 per guest day
5, 500
= $1, 000 (6, 500 $.1091)
Variable rate =
Fixed cost
(c)
July
$900
Dec.
Sept.
Aug.
$800
June
$700
$600
$500
Feb.
$400
Mar.
Jan.
Approx. $350
$300
$200
$100
$0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
$700
350
$350
$350
3,500 average guest days
Chapter 3
3-19
P3-5 (Continued)
(2)
The coefficient of correlation (r) and the coefficient of determination (r2), using
data from the requirement (1)(a) answer:
r =
r =
=
( x i x )(y i y )
( x i x )2 (y i y )2
Column 6 total
(Column 5 total) (Column 7 total)
3, 450, 000
3, 450, 000
=
(34, 000, 000)(380, 000)
12, 920, 000, 000, 000
3, 450, 000
= .9598
3, 594, 440
r 2 = .9212
(3)
Month
January ..................
February ................
March .....................
April........................
May .........................
June........................
July ........................
August....................
September .............
October ..................
November ..............
December ..............
Total....................
(1)
xi
(2)
yi
(3)
(yi = a + bxi )
Guest
Days
1,000
1,500
2,500
3,000
2,500
4,500
6,500
6,000
5,500
3,000
2,500
3,500
42,000
Actual
Electricity
Cost
$ 400
500
500
700
600
800
1,000
900
900
700
600
800
$8,400
Predicted
Electricity
Cost
$ 447
497
599
650
599
802
1,005
954
903
650
599
700
$8,405*
(4)
(yi yi)
(5)
(yi yi)2
Prediction
Error
Prediction
Squared
Error
(4)
(2) (3)
Squared
$(47)
$ 2,209
3
9
(99)
9,801
50
2,500
1
1
(2)
4
(5)
25
(54)
2,916
(3)
9
50
2,500
1
1
100
10,000
$ (5)*
$29,975
*rounding error
(y i y i )2
Column 5 total
$29, 975
5
s=
=
=
= $2, 997.5 = $54.75
12 2
10
n 2
3-20
Chapter 3
P3-5 (Concluded)
(4)
The 90% confidence interval for electricity cost at 2,000 guest days would be:
y i t 90%
( x i x )2
1
s 1+ +
n ( x i x )2
$106.35
P3-6
(1)
(a)
High ................................................................
Low .................................................................
Difference .......................................................
Variable rate = $100 1,000 Billets = $.10
Fixed cost = $500 ($.10 2,400 Billets) = $260
or
Fixed cost = $400 ($.10 1,400 Billets) = $260
Cost
$500
400
$100
Activity
2,400
1,400
1,000
Chapter 3
3-21
P3-6 (Continued)
(b)
ELECTRICITY
$400
$300
$200
$100
$0
0
500
1,000
1,500
2,000
BILLETS
2,500
3-22
Chapter 3
P3-6 (Continued)
(c)
Month
January............
February ..........
March ...............
April .................
May ..................
June .................
July ..................
August .............
September.......
October............
November ........
December ........
Total ...........
(1)
y
Electricity
Cost
$ 455
450
435
485
470
475
400
450
435
500
495
470
(2)
(3)
(4)
(y y )
x
(x x)
Cost
Number Activity
Deviations of Billets Deviations
(5)
2,000
0
(10)
1,800
(200)
(25)
1,900
(100)
25
2,200
200
10
2,100
100
15
2,000
0
(60)
1,400
(600)
(10)
1,900
(100)
(25)
1,800
(200)
40
2,400
400
35
2,300
300
10
2,200
200
$5,520
24,000
(5)
(x x)2
(4)
Squared
0
40,000
10,000
40,000
10,000
0
360,000
10,000
40,000
160,000
90,000
40,000
800,000
(6)
(7)
)2
(x x )(y y ) (y y
(2)
(4) (2)
Squared
0
25
2,000
100
2,500
625
5,000
625
1,000
100
0
225
36,000
3,600
1,000
100
5,000
625
16,000
1,600
10,500
1,225
2,000
100
81,000
8,950
= y n = $5,520 12 = $460
y
x = x n = 24,000 12 = 2,000
81, 000
( x x )(y y ) Column 6 total
=
= $.10125
=
2
( x x )
Column 5 total 800, 000
= y bx
Variable rate (b ) =
Fixed cost (a )
The coefficient of correlation (r) and the coefficient of determination (r2), using
data from the answer in requirement (1)(c) follow:
r=
( x i x )(y i y )
( x i x )2 (y i y )2
r 2 = (.957 )2 = .916
81, 000
= .957
7
(800, 000) (8, 950)
Chapter 3
3-23
P3-6 (Concluded)
(3)
Month
January ..................
February ................
March .....................
April........................
May .........................
June........................
July.........................
August....................
September .............
October ..................
November ..............
December ..............
Total....................
(1)
y
Actual
Electricity
Cost
$ 455
450
435
485
470
475
400
450
435
500
495
470
$5,520
(2)
x
Number
of
Billets
2,000
1,800
1,900
2,200
2,100
2,000
1,400
1,900
1,800
2,400
2,300
2,200
24,000
(3)
(y= a + bx)
Estimated
Electricity
Cost
$ 460
440
450
480
470
460
399
450
440
501
490
480
$5,520
(4)
(y y )
(5)
(y y )2
(1) (3)
(5)
10
(15)
5
0
15
1
0
(5)
(1)
5
(10)
0
(4)
Squared
25
100
225
25
0
225
1
0
25
1
25
100
752
(y y )2
Column 5 total
$752
s=
=
=
= $8.672
12 2
10
n 2
The 95% confidence interval for electricity costs at the 2,200 Billets level of
activity would be determined as follows:
a + bx t 95% s 1+
1 ( x x )2
+
n ( x x ) 2
28)($8.672) 1+
$257.50 + ($.10125)(2,200) (2.22
1 (2,200 2,000)2
+
12
800,000
$480.25 (2.228)($8.672)(1.065)
$480.25 $20.58
or between a low of $459.67 and a high of $500.83.
3-24
Chapter 3
P3-7
(1)
(1)
yi
Factory
Overhead
Cost
(2)
)
(yi y
Difference
from
Average
of $7,900
Direct
Labor
Hours
$8,500
9,900
8,950
9,000
8,150
7,550
7,050
6,450
6,900
7,500
7,150
7,800
600
2,000
1,050
1,100
250
(350)
(850)
(1,450)
(1,000)
(400)
(750)
(100)
2,000
2,400
2,200
2,300
2,000
1,900
1,400
1,000
1,200
1,700
1,600
1,900
200
600
400
500
200
100
(400)
(800)
(600)
(100)
(200)
100
8,700
9,300
9,300
8,700
8,000
7,650
6,750
7,100
7,350
7,250
7,100
7,500
800
1,400
1,400
800
100
(250)
(1,150)
(800)
(550)
(650)
(800)
(400)
2,100
2,300
2,200
2,200
2,000
1,800
1,200
1,300
1,500
1,700
1,500
1,800
Jan ...................
8,600
Feb ...................
9,300
Mar ...................
9,400
Apr. ..................
8,700
May ..................
8,100
June .................
7,600
July ..................
7,000
Aug...................
6,900
Sep...................
7,100
Oct ...................
7,500
Nov...................
7,000
Dec...................
7,600
Total ................. $284,400
700
1,400
1,500
800
200
(300)
(900)
(1,000)
(800)
(400)
(900)
(300)
0
2,000
2,300
2,300
2,200
2,000
1,800
1,300
1,200
1,300
1,800
1,500
1,900
64,800
Month
20A
Jan ...................
Feb ...................
Mar ...................
Apr ...................
May ..................
June .................
July ..................
Aug...................
Sep...................
Oct ...................
Nov...................
Dec...................
(3)
xi
(4)
(5)
(xi x)
(xi x)2
Difference
from Average
of 1,800
(4)
Hours
Squared
(6)
(7)
) (y y)2
(xi x)(yi y
i
(4) (2)
(2)
Squared
40,000
360,000
160,000
250,000
40,000
10,000
160,000
640,000
360,000
10,000
40,000
10,000
120,000
1,200,000
420,000
550,000
50,000
(35,000)
340,000
1,160,000
600,000
40,000
150,000
(10,000)
360,000
4,000,000
1,102,500
1,210,000
62,500
122,500
722,500
2,102,500
1,000,000
160,000
562,500
10,000
300
500
400
400
200
0
(600)
(500)
(300)
(100)
(300)
0
90,000
250,000
160,000
160,000
40,000
0
360,000
250,000
90,000
10,000
90,000
0
240,000
700,000
560,000
320,000
20,000
0
690,000
400,000
165,000
65,000
240,000
0
640,000
1,960,000
1,960,000
640,000
10,000
62,500
1,322,500
640,000
302,500
422,500
640,000
160,000
200
500
500
400
200
0
(500)
(600)
(500)
0
(300)
100
0
40,000
250,000
250,000
160,000
40,000
0
250,000
360,000
250,000
0
90,000
10,000
5,280,000
20B
Jan ...................
Feb ...................
Mar ...................
Apr ...................
May ..................
June .................
July ..................
Aug...................
Sep...................
Oct ...................
Nov...................
Dec...................
20C
140,000
490,000
700,000 1,960,000
750,000 2,250,000
320,000
640,000
40,000
40,000
0
90,000
450,000
810,000
600,000 1,000,000
400,000
640,000
0
160,000
270,000
810,000
(30,000)
90,000
11,625,000 29,155,000
Chapter 3
3-25
P3-7 (Continued)
b=
( x i x )(y i y )
( x i x )2 (y i y )2
Column 6 total
(Column 5 total) (Column 7 total)
r 2 = (.9370)2 = .8780
3-26
Chapter 3
P3-7 (Continued)
(3)
The standard error of the estimate:
(1)
xi
Month
20A
January ..................
February ................
March .....................
April .......................
May.........................
June .......................
July.........................
August ...................
September .............
October ..................
November ..............
December ..............
20B
January ..................
February ................
March .....................
April .......................
May.........................
June .......................
July.........................
August ...................
September .............
October ..................
November ..............
December ..............
20C
January ..................
February ................
March .....................
April .......................
May.........................
June .......................
July.........................
August ...................
September .............
October ..................
November ..............
December ..............
Total....................
Direct
Labor
Hours
(2)
yi
Actual
Factory
Overhead
Cost
(3)
(4)
(5)
(yi = a + bxi) (yi yi)
(yi yi)2
Predicted
Prediction
Factory
Prediction
Error
Overhead
Error
Squared
Cost
(2) (3)
(4) Squared
2,000
2,400
2,200
2,300
2,000
1,900
1,400
1,000
1,200
1,700
1,600
1,900
$ 8,500
9,900
8,950
9,000
8,150
7,550
7,050
6,450
6,900
7,500
7,150
7,800
$ 8,340
9,220
8,780
9,000
8,340
8,120
7,020
6,140
6,580
7,680
7,460
8,120
$160
680
170
0
(190)
(570)
30
310
320
(180)
(310)
(320)
$ 25,600
462,400
28,900
0
36,100
324,900
900
96,100
102,400
32,400
96,100
102,400
2,100
2,300
2,200
2,200
2,000
1,800
1,200
1,300
1,500
1,700
1,500
1,800
8,700
9,300
9,300
8,700
8,000
7,650
6,750
7,100
7,350
7,250
7,100
7,500
8,560
9,000
8,780
8,780
8,340
7,900
6,580
6,800
7,240
7,680
7,240
7,900
140
300
520
(80)
(340)
(250)
170
300
110
(430)
(140)
(400)
19,600
90,000
270,400
6,400
115,600
62,500
28,900
90,000
12,100
184,900
19,600
160,000
2,000
2,300
2,300
2,200
2,000
1,800
1,300
1,200
1,300
1,800
1,500
1,900
64,800
8,600
9,300
9,400
8,700
8,100
7,600
7,000
6,900
7,100
7,500
7,000
7,600
$284,400
8,340
9,000
9,000
8,780
8,340
7,900
6,800
6,580
6,800
7,900
7,240
8,120
$284,400
260
300
400
(80)
(240)
(300)
200
320
300
(400)
(240)
(520)
0
67,600
90,000
160,000
6,400
57,600
90,000
40,000
102,400
90,000
160,000
57,600
270,400
$3,560,200
Chapter 3
3-27
P3-7 (Concluded)
s=
(4)
(y i y i )2
Column 5 total
$3, 560, 200
=
=
= $104, 712 = $324
36 2
34
n 2
Since a large sample is used in this problem, t95% = z95% and the confidence
interval is:
y i
z 95% s
3-28
Chapter 3
P3-8
(1)
(1)
yi
Maintenance
Months
Cost
Jan., 20A.......... $ 1,195
Feb., 20A .........
1,116
Mar., 20A..........
1,390
Apr., 20A ..........
1,449
May, 20A ..........
1,618
June, 20A ........
1,525
July, 20A ..........
1,687
Aug., 20A .........
1,650
Sep., 20A .........
1,595
Oct., 20A..........
1,675
Nov., 20A .........
1,405
Dec., 20A .........
1,251
Jan., 20B..........
950
Feb., 20B .........
1,175
Mar., 20B..........
1,425
Apr., 20B ..........
1,506
May, 20B ..........
1,608
June, 20B ........
1,653
July, 20B ..........
1,675
Aug., 20B .........
1,724
Sep., 20B .........
1,626
Oct., 20B..........
1,575
Nov., 20B .........
1,653
Dec., 20B .........
1,418
Total ............ $35,544
(2)
)
(yi y
Cost
Deviation
(286)
(365)
(91)
(32)
137
44
206
169
114
194
(76)
(230)
(531)
(306)
(56)
25
127
172
194
243
145
94
172
(63)
0
(3)
xi
Labor
Hours
950
1,024
1,109
1,148
1,313
1,261
1,552
1,372
1,366
1,455
1,221
1,150
999
1,022
1,220
1,283
1,339
1,250
1,440
1,290
1,335
1,164
1,373
1,124
(4)
(xi x)
Activity
Deviation
(290)
(216)
(131)
(92)
73
21
312
132
126
215
(19)
(90)
(241)
(218)
(20)
43
99
10
200
50
95
(76)
133
(116)
29,760
(5)
(xi x)2
(4)
Squared
84,100
46,656
17,161
8,464
5,329
441
97,344
17,424
15,876
46,225
361
8,100
58,081
47,524
400
1,849
9,801
100
40,000
2,500
9,025
5,776
17,689
13,456
553,682
(6)
(7)
)2
(xi x )(yi y ) (yi y
(2)
(4) (2)
Squared
82,940
81,796
78,840
133,225
11,921
8,281
2,944
1,024
10,001
18,769
924
1,936
64,272
42,436
22,308
28,561
14,364
12,996
41,710
37,636
1,444
5,776
20,700
52,900
127,971
281,961
66,708
93,636
1,120
3,136
1,075
625
12,573
16,129
1,720
29,584
38,800
37,636
12,150
59,049
13,775
21,025
(7,144)
8,836
22,876
29,584
7,308
3,969
651,300
1,010,506
y = yi n = $35,544 24 = $1,481
x = xi n = 29,760 24 = 1,240
r
=
=
( x i x )(y i y )
( x i x )2 (y i y )2
Column 6 total
(Column 5 total) (Column 7 total)
651, 300
651, 300
651, 300
=
= .870725
=
(553, 682)(1, 010, 506)
559, 498,, 983, 092 747, 997
r 2 = (.870725)2 = .758162
Chapter 3
3-29
P3-8 (Continued)
(1)
yi
Maintenance
Months
Cost
Jan., 20A.......... $1,195
Feb., 20A .........
1,116
Mar., 20A..........
1,390
Apr., 20A ..........
1,449
May, 20A ..........
1,618
June, 20A ........
1,525
July, 20A ..........
1,687
Aug., 20A .........
1,650
Sep., 20A .........
1,595
Oct., 20A..........
1,675
Nov., 20A .........
1,405
Dec., 20A .........
1,251
Jan., 20B..........
950
Feb., 20B .........
1,175
Mar., 20B..........
1,425
Apr., 20B ..........
1,506
May, 20B ..........
1,608
June, 20B ........
1,653
July, 20B ..........
1,675
Aug., 20B .........
1,724
Sep., 20B .........
1,626
Oct., 20B..........
1,575
Nov., 20B .........
1,653
Dec., 20B .........
1,418
Total ............. $35,544
(2)
)
(yi y
Cost
Deviation
(286)
(365)
(91)
(32)
137
44
206
169
114
194
(76)
(230)
(531)
(306)
(56)
25
127
172
194
243
145
94
172
(63)
0
(3)
(4)
xi
(xi x)
Machine Activity
Hours Deviation
809
(266)
744
(331)
987
(88)
987
(88)
1,186
111
1,154
79
1,291
216
1,238
163
1,186
111
1,246
171
997
(78)
841
(234)
502
(573)
733
(342)
1,090
15
1,135
60
1,174
99
1,246
171
1,264
189
1,323
248
1,230
155
1,165
90
1,237
162
1,035
(40)
25,800
(5)
(xi x)2
(4)
Squared
70,756
109,561
7,744
7,744
12,321
6,241
46,656
26,569
12,321
29,241
6,084
54,756
328,329
116,964
225
3,600
9,801
29,241
35,721
61,504
24,025
8,100
26,244
1,600
1,035,348
(6)
(7)
) (y y)2
(x x)(y y
i
(2)
(4) (2)
Squared
76,076
81,796
120,815
133,225
8,008
8,281
2,816
1,024
15,207
18,769
3,476
1,936
44,496
42,436
27,547
28,561
12,654
12,996
33,174
37,636
5,928
5,776
53,820
52,900
304,263
281,961
104,652
93,636
(840)
3,136
1,500
625
12,573
16,129
29,412
29,584
36,666
37,636
60,264
59,049
22,475
21,025
8,460
8,836
27,864
29,584
2,520
3,969
1,013,826
1,010,506
y = yi n = $35,544 24 = $1,481
x = xi n = 25,800 24 = 1,075
r
=
=
( x i x )(y i y )
( x i x )2 (y i y )2
Column 6 total
(Column 5 total) (Column 7 total)
1, 013, 826
1, 013, 826
1, 013, 826
=
=
= .991176
1,, 046, 225, 366, 088 1, 022, 852
(1, 035, 348)(1, 010, 506)
r 2 = (.991176)2 = .982430
3-30
Chapter 3
P3-8 (Continued)
(2)
The activity measure used to predict maintenance expense should be machine
hours, which will result in the following cost estimates:
( x x )(y y ) Column 6 total 1, 013, 826
= $.979213 variable rate
=
=
( x x )2
Column 5 total 1, 035, 348
Since y = a + bx , then the estimated fixed cost is determined as follows:
a = y bx
b=
(1)
xi
Months
Jan., 20A ................
Feb., 20A ................
Mar., 20A ................
Apr., 20A ................
May, 20A.................
June, 20A ...............
July, 20A.................
Aug., 20A ...............
Sep., 20A................
Oct., 20A ................
Nov., 20A ................
Dec., 20A................
Jan., 20B ................
Feb., 20B ................
Mar., 20B ................
Apr., 20B ................
May, 20B.................
June, 20B ...............
July, 20B.................
Aug., 20B ...............
Sep., 20B................
Oct., 20B ................
Nov., 20B ................
Dec., 20B................
Total....................
*rounding error
Machine
Hours
809
744
987
987
1,186
1,154
1,291
1,238
1,186
1,246
997
841
502
733
1,090
1,135
1,174
1,246
1,264
1,323
1,230
1,165
1,237
1,035
25,800
(2)
(3)
(4)
yi
(yi = a + bxi) (yi yi)
Actual
Predicted Prediction
Maintenance Maintenance
Error
Cost
Cost
(2) (3)
$ 1,195
$ 1,221
$(26)
1,116
1,157
(41)
1,390
1,395
(5)
1,449
1,395
54
1,618
1,590
28
1,525
1,558
(33)
1,687
1,693
(6)
1,650
1,641
9
1,595
1,590
5
1,675
1,648
27
1,405
1,405
0
1,251
1,252
(1)
950
920
30
1,175
1,146
29
1,425
1,496
(71)
1,506
1,540
(34)
1,608
1,578
30
1,653
1,648
5
1,675
1,666
9
1,724
1,724
0
1,626
1,633
(7)
1,575
1,569
6
1,653
1,640
13
1,418
1,442
(24)
$35,544
$35,547*
$ (3)*
(y i y )2
Column 5 total
$17, 817
=
=
= $28.458103
s=
24 2
22
n 2
(5)
(yi yi)2
(4)
Squared
$ 676
1,681
25
2,916
784
1,089
36
81
25
729
0
1
900
841
5,041
1,156
900
25
81
0
49
36
169
576
$17,817
Chapter 3
3-31
P3-8 (Concluded)
(4)
The 95% confidence interval for maintenance cost at the 1,100 machine hour
level of activity is:
y i t 95% s 1+
( x i x )2
1
+
n ( x i x )2
3-32
Chapter 3
CASES
C3-1
(1)
=
=
=
=
a + bS
5.062 + (.023) (1,200)
5.062 + 27.6
32.662 or about 33 total workers
33
10
23
(2)
(3)
Jim Locter can use the regression in his planning for temporary workers if the
following conditions exist:
(a) The forecasted daily shipments are greater than 300 and do not deviate
too much from the actual shipments.
(b) The amount of work to be done is dependent only on the number of
shipments to be made and does not change from shipment to shipment.
(c) Worker productivity is expected to remain approximately the same as
that experienced during the period used to develop the regression.
(d) A strong cause and effect relationship exists between the dependent
variable and the independent variable.
(e) The time frame for a forecast is short-term.
(4)
Chapter 3
3-33
C3-2
(1)
(2)
The increase in y associated with a unit increase in x is 1.2. Therefore, a 500unit increase in x will result in a 600-unit increase (1.2 500) in y (direct labor
hours).
(a) The equation may be unreliable if the correlation is spurious. The
assumption is that there is a logical relationship between output and the
use of electric power and direct labor.
(b) The equation may be reliable under the conditions at the time of the
study, but if conditions change, the results may be unreliable.
(c) Data used were limited to a range of 5002,000 units.
(d) It is assumed that a straight-line assumption is valid.
(e) The coefficient of correlation is a measure of the extent to which two
variables are related linearly. It is a relative measure of goodness of fit.
More of the variation in y is explained by the regression equation for
direct labor hours than for electric power, that is, the equation for direct
labor hours is a better fit than the equation for electric power.
(f)
The standard error of the estimate is a measure of variation from the
regression line. If the observations are normally distributed about the
regression equation, the standard error can be interpreted in the same
way as the standard deviation. The standard error is greater in the case
of direct labor hours than in the case of electric power.
CGA-Canada (adapted). Reprint with permission.
C3-3
(1)
3-34
Chapter 3
C3-3 (Concluded)
(2)
(3)
C3-4
(1)
(2)
(3)
Chapter 3
3-35
C3-4 (Concluded)
(b)
(4)
(a)
(b)
(c)
(d)
(e)
The standard error of the estimate which measures the dispersion of the
observed points about the regression line. A standard error of the
estimate approaching zero indicates a good fit.
The term linearity within a relevant range means that in a specific
situation, a straight-line relationship between the dependent variable and
the independent variables can be assumed only within the range of
historically observed values.
The term constant variance (homoscedasticlty) means that the
distribution of the observations about the regression line is uniform for
all values of the independent variables within the observed range of
values.
The term serial correlation refers to the lack of independence in a
series of successive observations over time. The deviation of a value
from the regression line should be unrelated to the deviation of any
other point from this line.
The term normality means that the joint probability distribution of the
variables is normally distributed (multivariate normal). The frequency of
the observations should approximate a normal curve.
The term multicollinearity refers to the correlation of independent
variables. When independent variables are highly correlated with each
other, the relationship(s) between the independent variables may
obscure the relationship between the independent variables(s) and the
dependent variable.
C3-5
(1)
(2)
(a)
3-36
Chapter 3
C3-5 (Concluded)
(3)
(4)
Equation 4 is the best. The coefficient of correlation and the coefficient of determination are the highest of the four equations. The coefficient of determination
indicates that 70.3% of the sample variance of automobile sales is explained by
the regression. For predictive purposes, the standard error of the estimate at
.922 is also the lowest of the four models, giving the tightest (smallest) physical confidence interval of any of the equations.
Equation 3 assumes that factory rebates (R) are dependent on advertising
funds (A). The results of the analysis show that factory rebates and advertising
funds are almost totally independent and, therefore, cannot be used to predict
each other. The results of Equation 3 lend credibility to the use of A and R in
Equation 4. The independence of A and R reduces the possible negative
aspects of collinearity.