Appendix 5A, Least-Squares Regression Computations

5A)LO5: Least-squares regression (Appendix LO4: Contribution format income statement LO1: Understand fixed and variable costs

1 2 3 4 5A1 5A2 5A3 5-6 7-8 9-10 11 12 13 14

Question Type T/F M/C M/C M/C Multipart M/C Multipart M/C Multipart M/C Problem Problem Problem Problem

Professional Exam Adapted

LO2: Scattergraph analysis

LO3: High-low analysis

Difficulty

E H H H M M M H H H H

x x x x x x x x x x x

ID New,6/27/97,A New,6/28/97,A8 8/22/2004 Single MC G3 8/22/2004 Single MC H3 8/21/2004 Multi MC G3 8/21/2004 Multi MC H3 8/21/2004 Multi MC I3 New,6/29/97,A8 8/21/2004 Problem H3 8/21/2004 Problem I3 8/22/2004 Problem J3

Origin E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N. E.N.

CMA/CPA origin

5A-1

Appendix 5A, Least-Squares Regression Computations

True / False Questions 1. The R2 (i.e., R-squared) indicates the proportion of a mixed cost that is variable. True False

Multiple Choice Questions 2. Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost over four recent periods appear below.

Using the least-squares regression method, what is the cost formula for this cost? A. Y = $24.51 + $1.08X B. Y = $10.33 + $1.92X C. Y = $0.00 + $2.32X D. Y = $15.80 + $1.70X

5A-2

Appendix 5A, Least-Squares Regression Computations

3. Delreal Inc.'s inspection costs are listed below:

Management believes that inspection cost is a mixed cost that depends on the number of units produced. Using the least-squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to: A. $20.27 per unit plus $5,905 per month B. $44.44 per unit plus $10,867 per month C. $20.68 per unit plus $5,807 per month D. $20.57 per unit plus $5,837 per month

5A-3

Appendix 5A, Least-Squares Regression Computations

4. The management of Smoots Corporation would like for you to analyze their repair costs, which are listed below:

Management believes that repair cost is a mixed cost that depends on the number of machinehours. Using the least-squares regression method, the estimates of the variable and fixed components of repair cost would be closest to: A. $4.64 per machine-hour plus $34,603 per month B. $2.09 per machine-hour plus $19,018 per month C. $2.79 per machine-hour plus $13,787 per month D. $2.00 per machine-hour plus $19,649 per month

5A-4

Appendix 5A, Least-Squares Regression Computations

Magnano Inc.'s inspection costs are listed below:

Management believes that inspection cost is a mixed cost that depends on units produced.

5. Using the least-squares regression method, the estimate of the variable component of inspection cost per unit produced is closest to: A. $3.51 B. $3.49 C. $4.93 D. $3.54

6. Using the least-squares regression method, the estimate of the fixed component of inspection cost per month is closest to: A. $4,400 B. $1,290 C. $4,585 D. $1,318

5A-5

Appendix 5A, Least-Squares Regression Computations

Recent maintenance costs of Pavelko Corporation are listed below:

Management believes that maintenance cost is a mixed cost that depends on machine-hours.

7. Using the least-squares regression method, the estimate of the variable component of maintenance cost per machine-hour is closest to: A. $3.26 B. $13.45 C. $2.00 D. $2.96

8. Using the least-squares regression method, the estimate of the fixed component of maintenance cost per month is closest to: A. $7,826 B. $6,036 C. $7,950 D. $6,199

5A-6

Appendix 5A, Least-Squares Regression Computations

Meleski Corporation's recent utility costs are listed below:

Management believes that utility cost is a mixed cost that depends on machine-hours.

9. Using the least-squares regression method, the estimate of the variable component of utility cost per machine-hour is closest to: A. $4.40 B. $4.79 C. $3.47 D. $3.37

10. Using the least-squares regression method, the estimate of the fixed component of utility cost per month is closest to: A. $4,649 B. $5,028 C. $16,975 D. $16,850

5A-7

Appendix 5A, Least-Squares Regression Computations

Essay Questions 11. Below are cost and activity data for a particular cost over the last four periods. Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity.

Required: Using the least-squares regression method, estimate the cost formula for this cost.

5A-8

Appendix 5A, Least-Squares Regression Computations

12. Mccatty Inc. maintains a call center to take orders, answer questions, and handle complaints. The costs of the call center for a number of recent months are listed below:

Management believes that the cost of the call center is a mixed cost that depends on the number of calls taken. Required: Estimate the variable cost per call and fixed cost per month using the least-squares regression method.

5A-9

Appendix 5A, Least-Squares Regression Computations

13. The management of Archie Corporation would like to better understand the behavior of the company's warranty costs. Those costs are listed below for a number of recent months:

Management believes that warranty cost is a mixed cost that depends on the number of product returns. Required: Estimate the variable cost per product return and the fixed cost per month using the leastsquares regression method.

5A-10

Appendix 5A, Least-Squares Regression Computations

14. Stamp Printing Corp., a book printer, has provided the following data:

Management believes that the press setup cost is a mixed cost that depends on the number of titles printed. (A specific book that is to be printed is called a "title". Typically, thousands of copies will be printed of each title. Specific steps must be taken to setup the presses for printing each title-for example, changing the printing plates. The costs of these steps are the press setup costs.) Required: Estimate the variable cost per title printed and the fixed cost per month using the least-squares regression method.

5A-11

Appendix 5A, Least-Squares Regression Computations Key

True / False Questions 1. The R2 (i.e., R-squared) indicates the proportion of a mixed cost that is variable. FALSE

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Easy

5A-12

Appendix 5A, Least-Squares Regression Computations Key

Multiple Choice Questions 2. Your boss would like you to estimate the fixed and variable components of a particular cost. Actual data for this cost over four recent periods appear below.

Using the least-squares regression method, what is the cost formula for this cost? A. Y = $24.51 + $1.08X B. Y = $10.33 + $1.92X C. Y = $0.00 + $2.32X D. Y = $15.80 + $1.70X The solution using Microsoft Excel functions is: slope = $1.70 per activity intercept = $15.80 per period The solution using the formulas in the text is: n=4 sumX = 102 sumY = $237 sumXY = $6,127 sumX2 = 2,650 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [4($6,127) - (102)( $237))]/[4(2,650) - (102)^2] = $1.70 a = [(sumY) - b(sumX)]/n = [($237) - $1.70(102)]/4 = $15.80 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Hard

5A-13

Appendix 5A, Least-Squares Regression Computations Key

3. Delreal Inc.'s inspection costs are listed below:

Management believes that inspection cost is a mixed cost that depends on the number of units produced. Using the least-squares regression method, the estimates of the variable and fixed components of inspection cost would be closest to: A. $20.27 per unit plus $5,905 per month B. $44.44 per unit plus $10,867 per month C. $20.68 per unit plus $5,807 per month D. $20.57 per unit plus $5,837 per month The solution using Microsoft Excel functions is: slope = $20.57 per unit intercept = $5,837 per month The solution using the formulas in the text is: n=8 sumX = 1,956 sumY = $86,933 sumXY = $21,334,856 sumX2 = 482,118 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($21,334,856) - (1,956)( $86,933))]/[8(482,118) - (1,956)^2] = $20.57 a = [(sumY) - b(sumX)]/n = [($86,933) - $20.57(1,956)]/8 = $5,837 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Hard

5A-14

Appendix 5A, Least-Squares Regression Computations Key

4. The management of Smoots Corporation would like for you to analyze their repair costs, which are listed below:

Management believes that repair cost is a mixed cost that depends on the number of machinehours. Using the least-squares regression method, the estimates of the variable and fixed components of repair cost would be closest to: A. $4.64 per machine-hour plus $34,603 per month B. $2.09 per machine-hour plus $19,018 per month C. $2.79 per machine-hour plus $13,787 per month D. $2.00 per machine-hour plus $19,649 per month The solution using Microsoft Excel functions is: slope = $2.00 per machine-hour intercept = $19,649 per month The solution using the formulas in the text is: n=8 sumX = 59,675 sumY = $276,827 sumXY = $2,064,972,610 sumX2 = 445,146,287 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($2,064,972,610) - (59,675)( $276,827))]/[8(445,146,287) - (59,675)^2] = $2.00 a = [(sumY) - b(sumX)]/n = [($276,827) - $2.00(59,675)]/8 = $19,649 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Hard

5A-15

Appendix 5A, Least-Squares Regression Computations Key

Magnano Inc.'s inspection costs are listed below:

Management believes that inspection cost is a mixed cost that depends on units produced.

5A-16

Appendix 5A, Least-Squares Regression Computations Key

5. Using the least-squares regression method, the estimate of the variable component of inspection cost per unit produced is closest to: A. $3.51 B. $3.49 C. $4.93 D. $3.54 The solution using Microsoft Excel functions is: slope = $3.54 per unit intercept = $1,290 per month The solution using the formulas in the text is: n=8 sumX = 7,446 sumY = $36,680 sumXY = $34,166,530 sumX2 = 6,937,884 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($34,166,530) - (7,446)( $36,680))]/[8(6,937,884) - (7,446)^2] = $3.54 a = [(sumY) - b(sumX)]/n = [($36,680) - $3.54(7,446)]/8 = $1,290 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Medium

5A-17

Appendix 5A, Least-Squares Regression Computations Key

6. Using the least-squares regression method, the estimate of the fixed component of inspection cost per month is closest to: A. $4,400 B. $1,290 C. $4,585 D. $1,318 The solution using Microsoft Excel functions is: slope = $3.54 per unit intercept = $1,290 per month The solution using the formulas in the text is: n=8 sumX = 7,446 sumY = $36,680 sumXY = $34,166,530 sumX2 = 6,937,884 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($34,166,530) - (7,446)( $36,680))]/[8(6,937,884) - (7,446)^2] = $3.54 a = [(sumY) - b(sumX)]/n = [($36,680) - $3.54(7,446)]/8 = $1,290 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Medium

5A-18

Appendix 5A, Least-Squares Regression Computations Key

Recent maintenance costs of Pavelko Corporation are listed below:

Management believes that maintenance cost is a mixed cost that depends on machine-hours. 7. Using the least-squares regression method, the estimate of the variable component of maintenance cost per machine-hour is closest to: A. $3.26 B. $13.45 C. $2.00 D. $2.96 The solution using Microsoft Excel functions is: slope = $2.96 per machine-hour intercept = $6,199 per month The solution using the formulas in the text is: n=8 sumX = 4,729 sumY = $63,599 sumXY = $37,616,495 sumX2 = 2,802,701 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($37,616,495) - (4,729)( $63,599))]/[8(2,802,701) - (4,729)^2] = $2.96 a = [(sumY) - b(sumX)]/n = [($63,599) - $2.96(4,729)]/8 = $6,199 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Medium

5A-19

Appendix 5A, Least-Squares Regression Computations Key

8. Using the least-squares regression method, the estimate of the fixed component of maintenance cost per month is closest to: A. $7,826 B. $6,036 C. $7,950 D. $6,199 The solution using Microsoft Excel functions is: slope = $2.96 per machine-hour intercept = $6,199 per month The solution using the formulas in the text is: n=8 sumX = 4,729 sumY = $63,599 sumXY = $37,616,495 sumX2 = 2,802,701 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($37,616,495) - (4,729)( $63,599))]/[8(2,802,701) - (4,729)^2] = $2.96 a = [(sumY) - b(sumX)]/n = [($63,599) - $2.96(4,729)]/8 = $6,199 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Medium

5A-20

Appendix 5A, Least-Squares Regression Computations Key

Meleski Corporation's recent utility costs are listed below:

Management believes that utility cost is a mixed cost that depends on machine-hours.

9. Using the least-squares regression method, the estimate of the variable component of utility cost per machine-hour is closest to: A. $4.40 B. $4.79 C. $3.47 D. $3.37 The solution using Microsoft Excel functions is: slope = $3.37 per machine-hour intercept = $5,028 per month n=8 sumX = 28,376 sumY = $135,800 sumXY = $481,690,192 sumX2 = 100,651,926 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($481,690,192) - (28,376)( $135,800))]/[8(100,651,926) - (28,376)^2] = $3.37 a = [(sumY) - b(sumX)]/n = [($135,800) - $3.37(28,376)]/8 = $5,028 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Medium

5A-21

Appendix 5A, Least-Squares Regression Computations Key

10. Using the least-squares regression method, the estimate of the fixed component of utility cost per month is closest to: A. $4,649 B. $5,028 C. $16,975 D. $16,850 The solution using Microsoft Excel functions is: slope = $3.37 per machine-hour intercept = $5,028 per month The solution using the formulas in the text is: n=8 sumX = 28,376 sumY = $135,800 sumXY = $481,690,192 sumX2 = 100,651,926 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($481,690,192) - (28,376)( $135,800))]/[8(100,651,926) - (28,376)^2] = $3.37 a = [(sumY) - b(sumX)]/n = [($135,800) - $3.37(28,376)]/8 = $5,028 Any difference in the solutions is due to rounding errors when the formulas are used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Medium

5A-22

Appendix 5A, Least-Squares Regression Computations Key

Essay Questions 11. Below are cost and activity data for a particular cost over the last four periods. Your boss has asked you to analyze this cost so that management will have a better understanding of how this cost changes in response to changes in activity.

Required: Using the least-squares regression method, estimate the cost formula for this cost. n=4 sumX = 180 sumY = 1,382 sumXY = 62,247 sumX^2 = 8,110 b = [n(sumXY)-(sumX)(sumY)]/[n(sumX^2)-(sumX)^2] = [4(62,247)-(180)(1,382)]/[4(8,110)-(180)^2] = $5.70 (rounded to nearest whole cent) a = [(sumY)-b(sumX)]/n = [(1,382)-5.70(180)]/4 = $89 (rounded to nearest whole dollar) Cost formula: Y = $89 + $5.70X.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Hard

5A-23

Appendix 5A, Least-Squares Regression Computations Key

12. Mccatty Inc. maintains a call center to take orders, answer questions, and handle complaints. The costs of the call center for a number of recent months are listed below:

Management believes that the cost of the call center is a mixed cost that depends on the number of calls taken. Required: Estimate the variable cost per call and fixed cost per month using the least-squares regression method. The solution using Microsoft Excel functions is: slope = $6.38 per call intercept = $43,652 per month The solution using the formulas in the text is: n=8 sumX = 21,016 sumY = $483,359 sumXY = $1,269,796,718 sumX2 = 55,211,010 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($1,269,796,718) - (21,016)($483,359))]/[8(55,211,010) - (21,016)^2] = $6.38 a = [(sumY) - b(sumX)]/n = [($483,359) - $6.38(21,016)]/8 = $43,652 Any difference in the solutions is due to rounding errors when the formulas are used.

5A-24

Appendix 5A, Least-Squares Regression Computations Key

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Hard

5A-25

Appendix 5A, Least-Squares Regression Computations Key

13. The management of Archie Corporation would like to better understand the behavior of the company's warranty costs. Those costs are listed below for a number of recent months:

Management believes that warranty cost is a mixed cost that depends on the number of product returns. Required: Estimate the variable cost per product return and the fixed cost per month using the leastsquares regression method. The solution using Microsoft Excel functions is: slope = $12.47 per product return intercept = $3,545 per month The solution using the formulas in the text is: n=8 sumX = 275 sumY = $31,792 sumXY = $1,095,019 sumX2 = 9,627 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($1,095,019) - (275)($31,792))]/[8(9,627) - (275)^2] = $12.47 a = [(sumY) - b(sumX)]/n = [($31,792) - $12.47(275)]/8 = $3,545 Any difference in the solutions is due to rounding errors when the formulas are used.

5A-26

Appendix 5A, Least-Squares Regression Computations Key

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Hard

5A-27

Appendix 5A, Least-Squares Regression Computations Key

14. Stamp Printing Corp., a book printer, has provided the following data:

Management believes that the press setup cost is a mixed cost that depends on the number of titles printed. (A specific book that is to be printed is called a "title". Typically, thousands of copies will be printed of each title. Specific steps must be taken to setup the presses for printing each title-for example, changing the printing plates. The costs of these steps are the press setup costs.) Required: Estimate the variable cost per title printed and the fixed cost per month using the least-squares regression method. The solution using Microsoft Excel functions is: slope = $22.01 per title printed intercept = $1,351 per month The solution using the formulas in the text is: n=8 sumX = 315 sumY = $17,744 sumXY = $706,460 sumX2 = 12,757 b = [n(sumXY) - (sumX)(sumY))]/[n(sumX^2) - (sumX)^2] = [8($706,460) - (315)($17,744))]/[8(12,757) - (315)^2] = $22.01 a = [(sumY) - b(sumX)]/n = [($17,744) - $22.01(315)]/8 = $1,351 Any difference in the solutions is due to rounding errors when the formulas are used.

5A-28

Appendix 5A, Least-Squares Regression Computations Key

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 5 Level: Hard

5A-29