Simple Regression Analysis:

Problem 2. Cost accounts often estimating overhead based on the level of the
production. At the standard knitting co, they have collected information on
overhead expenses and units produced at different plants, and want to estimate a
regression equation to predict future overhead.

Overhead: 191 170 272 155 280 173 234 116 153 178

Units: 40 42 53 35 56 39 48 30 37 40

a. Determine the independent and dependent variable.

b. Draw the research model and write the research hypothesis.
c. Fit the model using the above data.
d. Interpret the finding of the model.
e. Test the significance of the slope at 5% level of significance.
f. Assess the model using error of the estimate and coefficient of
determination.
g. Predict overhead when 50 units are produced.

Solution:

a. The overhead expenses depend on the production units. So the overhead is

taken as the dependent variable(Y) and the units of the production is the
independent variable(X).

b. The research model between the overhead and the production units is :

Independent variable Dependent variable

Production units(X) Overhead expenses(Y)

Figure: “ Research model”

Research hypothesis
Null hypothesis (H0) ᵦ =0( There is no significant relationship between Production unit and
1

overhead expenses.)

Alternative hypothesis (H1) ᵦ ≠0(There is significant relationship between production units

1

and overhead expenses)

C. Fitting the data:

Since both variables of the models is quantitative in nature, so simple regression analysis is used
to measure the effect of production overhead on production unit. The regression model between
these two variables is expressed as:

Regression equation: Ῠ= bo + b1X --------- (1)

Then ,

Production Overhear (Y) XY X2 Y2

units (X)
40 191 7640 1600 36481
42 170 7140 1764 28900
53 272 14416 2809 73984
35 155 5425 1225 24025
56 280 15680 3136 78400
39 173 6747 1521 29929
48 234 11232 2304 54756
30 116 3480 900 13456
37 153 5661 1369 23409
40 178 7120 1600 31684
∑X= 420 ∑Y= 1922 ∑XY=84541 ∑X 2=18228 ∑Y2 =395024

∑X 420
XX = = = 42
n 10

∑Y 1922
YX = = = 192.2
n 10

X́
¿
¿
b1 = 2
∑ x −n ¿
∑ XY −n XXYX
¿
84541−10∗42∗19 2 .2
¿
18228−10∗1764
b1 = 6.49

b0 = YX - b1 XX

=192.2-(6.49*42)

b0 = -80.44
The Fitted regression model between overhead and production unit is

Ÿ = -80.44 + 6.49X

D. Interpretation of finding of the model:

The value of regression coefficient b1 is 6.49. This shows the positive relationship between production
unit and overhead. The increase in overhead by Rs 6.49 increase the unit of production by 1 unit.

E. Testing the significance level:

Null hypothesis (H0) ᵦ =0( There is no significant relationship between Production unit and
1

overhead expenses.)

Alternative hypothesis (H1) ᵦ ≠0(There is significant relationship between production units

1

and overhead expenses)

Tcal= b1\ sb1

Where
2
x
¿
sb1 ¿ se \ ∑¿
∑ ∑ x 2−n ´¿
√¿

√ ∑Y 2−bo ∑Y −b 1 ∑ XY
n−2

√∑Y 2−b 1∑ XY
10−2

Level of significance = .05

Degree of freedom = n-2

=10-2=8