Exam 8: Cost Estimation

For a simple regression analysis model that is used to allocate factory overhead, an internal auditor finds that the intersection of the line of best fit for the overhead allocation with the y-axis is $5,000. The slope of the line is .20. The independent variable, factory wages, amounts to $900,000 for the month. What is the estimated amount of factory overhead to be allocated for the month?

Jackson, Inc.is preparing a budget for the coming year and requires a breakdown of the cost of electrical power used in its factory into the fixed and variable elements.The following data on the cost of power used and direct labor hours worked are available for the last six months of this year: Assuming that Jackson uses the high-low method of analysis, the estimated variable cost of steam per direct labor hour is:

Audio Zone Co. needs to prepare pro forma financial statements for the next fiscal year. To do so, the company must forecast its total overhead cost. The actual machine hours and total overhead cost are presented below for the past six months.Using the high-low method, total monthly fixed overhead cost is calculated to be:

CalcuCo hired Effner & Associates to design a new computer-aided manufacturing facility. The new facility was designed to produce 300 computers per month. The variable costs for each computer are $660 and the fixed costs total $74,700 per month. The average cost per unit, if the facility normally expects to operate at eighty-five percent of capacity, is calculated to be (round to nearest cent):

Whittenberg Distributors, a major retailing and mail-order operation, has been in business for the past 10 years. During that time, its mail-order operations have grown from a sideline to represent more than 80 percent of the company's annual sales. Of course, the company has suffered growing pains. At times, overloaded or faulty computer programs resulted in lost sales. And scheduling temporary workers to augment the permanent staff during peak periods has always been a problem. Peter Bloom, manager of mail-order operations, has developed procedures for handling most problems. However, he is still trying to improve the scheduling of temporary workers to take customer telephone orders. Under the current system, Peter keeps a permanent staff of 60 employees who handle the base telephone workload and supplements this staff with temporary workers as needed. The temporary workers are hired on a daily basis; he determines the number needed for the next day the afternoon before based on his estimate of the upcoming telephone volume. Peter has decided to try regression analysis to improve the hiring of temporary workers. By summarizing the daily labor-hours into weekly totals for the past year, he determined the number of workers used each week. In addition, he listed the number of orders processed each week. After entering the data into a spreadsheet, Peter ran two regressions. Regression 1 related the total number of workers (permanent staff plus temporary workers) to the number of orders received. Regression 2 related only temporary workers to the number of orders received. The output of these analyses follows: Regression model: W = a + b × T where: W = workers; T = telephone orders Required: 1. Peter Bloom estimates that Whittenberg Distributors will receive 12,740 orders during the second week of December. a. Predict the number of temporary workers needed for this week using regression 1. (Round your answer to the nearest whole number.) b. Using regression 2, predict the number of temporary workers needed during this week. (Round your answer to the nearest whole number.) 2. Which of the two regression analyses appears to be better? Explain your answer. 3. Describe at least three ways that Peter Bloom could improve his analysis to make better predictions than either of these regression results provides. (CMA Adapted)

A variable used in regression analysis that represents the presence or absence of a condition, e.g., seasonality, is called a(n):

Regression analysis is increasingly being used in business applications, often called "business analytics" (or "predictive analytics"), in which a company studies its customers to gather information that can be used to make each customer more profitable.Companies that do this include Harrah's and eHarmony, among many others. Required: (1) Briefly explain how a company could use regression to improve customer profitability. (2) Do you see any ethical issues involved in the use of business analytics? Explain.

Burmer Co. has accumulated data to use in preparing its annual profit plan for the upcoming year. The cost behavior pattern of the maintenance costs must be determined. Data regarding the machine hours and maintenance costs for the last year and the results of the regression analysis are as follows:A staff assistant has run regression analyses on the data and obtained the following output using Excel: REGRESSION ANALYSIS Y (Dependent) Variable: Maintenance Cost X (Independent) Variable: Maintenance Hours Using regression analysis, what is the estimated maintenance expense for a month that the firm expects to operate 600 machine hours (round to nearest whole dollar)?

Data collected on the cost objects and cost drivers for cost estimation must be:

US Best Corporation produces and distributes products nationwide, and competes on cost leadership. In order to maintain its current industry cost and price leadership role, US Best uses cost-based pricing techniques. One of the factors considered in determining future prices is the Consumer Price Index (CPI). Considerable discussion over the past few years on the national level has strongly suggested the monthly CPI inflation adjustment figure is skewed upward by as much as one percentage point. Required: What implication does this purported inflation exaggeration in the Consumer Price Index have on US Best Corporation's cost-based pricing changes in the near future?

Kumar Co. is attempting to predict its maintenance costs more accurately. Maintenance costs are a mixed cost. Maintenance costs and machine hours for the first four months of the year are as follows: Required: Using the high-low method, calculate unit variable cost and monthly fixed costs.

When there are two or more cost drivers, regression is termed:

Based in Minneapolis, Minnesota, the Hubert Memorial Foundation has $300 million in investments and contributes approximately 80 percent of the average annual return of $25 million to worthy causes. Individuals and groups requesting grants of $100,000 or more must make an in-person presentation of their request. These presentations generally involve three to five individuals and take an average of two hours each. The Executive Director of the Hubert Foundation is concerned with the cost of resources used to schedule and accommodate the 500 to 600 group presentations each year. She has asked you for suggestions about what kind of cost data to gather, and ways to classify the data to help her understand cause/effect relationships between costs and results. Required: Write a brief memo to the Executive Director giving her some basic information on cost classification and behavior.

The following costs were for Optimal View Inc., a contact lens manufacturer:At an output level of 500 lenses, per unit total cost is projected to be:

The independent variable in regression analysis is:

Burmer Co. has accumulated data to use in preparing its annual profit plan for the upcoming year. The cost behavior pattern of the maintenance costs must be determined. Data regarding the machine hours and maintenance costs for the last year and the results of the regression analysis are as follows:A staff assistant has run regression analyses on the data and obtained the following output using Excel: REGRESSION ANALYSIS Y (Dependent) Variable: Maintenance Cost X (Independent) Variable: Maintenance Hours The Lower 95% and Upper 95% shown in the output suggests that:

The identification of cost drivers is perhaps the most important step in developing the cost estimate because:

A company allocates its variable factory overhead based on direct labor hours.During the past three months, the actual direct labor hours and the total factory overhead allocated were as follows: Based upon this information, monthly fixed factory overhead was:

The standard error of the estimate (SE) in a regression analysis is:

Which of the following is not a correct pairing of estimated costs and its related cost driver?