Chapter 2: The Cost Function
Page 2-56
Scatter Plot of Adjusted Overhead Costs Against Direct Labor Hours
Overhead Costs
$75,000 $70,000 $65,000 $60,000
Outlier
$55,000 $50,000 $45,000 $40,000 2,000
3,500
5,000
6,500
8,000
9,500
Direct Labor Hours
C. Here are the regression results: Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations
Intercept X Variable 1
0.641981 0.412139 0.314163 1980.47 8
Coefficients 8777.818 6.789722
Standard Error 29406.26 3.310484
t Stat 0.298502 2.050976
P-value 0.775388 0.086126
Based on the t-statistic and p-value for the intercept, the fixed cost does not appear to be different from zero. Therefore, the cost function is estimated as: Overhead cost = $6.79 ď‚´ direct labor hours This cost function does not provide accurate estimates for future costs because the direct labor hours explain only about 31% of the variation in overhead costs (based on the adjusted R-square). Thus, considerable future variation in overhead costs is likely to occur due to factors other than changes in direct labor hours. D. According to the details provided for August and September, supplies were a large proportion of overhead cost. Based on the variation in dates at which supplies are
Eldenburg & Wolcott 2e
Solutions August 2010