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Category > Accounting Posted 24 Aug 2017 My Price 13.00

Hard Rock Mining Company

EXERCISE  3A–2  Least-Squares Regression [LO4]                                                               

The Hard Rock Mining Company is developing cost formulas for management planning and  de-

cision making. The company’s cost analyst has concluded that utilities cost is a mixed cost, and he is attempting to find a base with which the cost might be closely correlated. The controller has

 

 

100                                                    Chapter 3 Cost Behaviour: Analysis and Use

 

suggested that tonnes mined might be a good base to use in developing a cost formula. The pro- duction manager disagrees; she thinks that direct labour-hours would be a better base. The cost analyst has decided to try both bases and has assembled the following information:

 

 

Quarter

Tonnes Mined

Direct Labour-Hours

Utilities Cost

Year 1:

 

 

 

First

15,000

5,000

$50,000

Second

11,000

3,000

45,000

Third

21,000

4,000

60,000

Fourth

12,000

6,000

75,000

Year 2:

 

 

 

First

18,000

10,000

$100,000

Second

25,000

9,000

105,000

Third

30,000

8,000

85,000

Fourth

28,000

11,000

120,000

 

Required:

1.              Using tonnes mined as the independent (X) variable:

a.        Determine a cost formula for utilities cost using the least-squares regression method. Calculate the R2 as part of your analysis.

b.        Prepare a scattergram and plot the tonnes mined and utilities cost.

2.              Using direct labour-hours as the independent (X) variable, repeat the computations in 1(a) and (b) above.

3.              Would you recommend that the company use tonnes mined or direct labour-hours as a base for planning utilities cost?

Answers

Maurice Tutor
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Status NEW Posted 24 Aug 2017 12:08 AM My Price 13.00

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