Question: Your company is preparing an estimate of
Your company is preparing an estimate of its production costs for the coming period. The controller estimates that direct materials costs are $45 per unit and that direct labor costs are $21 per hour. Estimating overhead, which is applied on the basis of direct labor costs, is difficult.
The controller’s office estimated overhead costs at $3,600 for fixed costs and $18 per unit for variable costs. Your colleague, Lance, who graduated from a rival school, has already done the analysis and reports the “correct†cost equation as follows:
Overhead = $10,600 + $16.05 per unit
Lance also reports that the correlation coefficient for the regression is .82 and says, “With 82 percent of the variation in overhead explained by the equation, it certainly should be adopted as the best basis for estimating costs.â€
When asked for the data used to generate the regression, Lance produces the following:
The company controller is somewhat surprised that the cost estimates are so different. You have therefore been assigned to check Lance’s equation. You accept the assignment with glee.
Required
Analyze Lance’s results and state your reasons for supporting or rejecting his cost equation.
Transcribed Image Text:
Month Overhead Unit Production 1.... 2.... $57,144 60,756 77,040 56,412 81,396 72,252 63,852 73,596 77,772 60,048 61,632 73,920 73,248 3,048 3,248 4,176 3,000 3,408 3,928 3,336 4,016 4,120 3,192 3,368 4,080 3,888 3.. 4.. 6... 7 9... 10.. 11 12.... 13...
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