the range of 2 to sections, but they may be invalid outside this range. CASE 2A-5 (45 minutes) 1. and 2. The scattergraph plot and regression estimates of fixed and variable costs using Microsoft Excel are shown below: The scattergraph reveals three interesting findings. First, it indicates the relation between overhead expense and labor hours is approximated reasonably well by a straight line. (However, there appears to be a slight downward bend in the plot as the labor-hours increase—evidence of increasing returns to scale. This is a common occurrence in practice. See Noreen & Soderstrom, overhead costs strictly proportional to “Are activity?” Journal of Accounting and Economics, vol. 17, 1994, pp. Second, the data points are all fairly to the straight line. This indicates that most of the variation in overhead expenses is explained by labor hours. As a consequence, there probably wouldn’t be much benefit to investigating other possible cost drivers for the overhead expenses. Third, most of the overhead expense appears to be fixed. Maria should ask herself if this is reasonable. Does the company have large fixed expenses such as rent, depreciation, and salaries? CASE 2A-5 (continued) The cost formula, in the form Y = a + bX, using labor-hours as the activity base is $48,126 per month plus $3.95 per labor-hour, or: Y = $48,126 + $3.95X. Note that the R2 is approximately 0.96, which means that 96% of the variation in cost is explained by labor-hours. This is a very high R2 which indicates a very good fit. 3. Using the least-squares regression estimate of the variable overhead cost, the total variable cost per guest is computed as follows:
the range of 2 to sections, but they may be invalid outside this range. CASE 2A-5 (45 minutes) 1. and 2. The scattergraph plot and regression estimates of fixed and variable costs using Microsoft Excel are shown below: The scattergraph reveals three interesting findings. First, it indicates the relation between overhead expense and labor hours is approximated reasonably well by a straight line. (However, there appears to be a slight downward bend in the plot as the labor-hours increase—evidence of increasing returns to scale. This is a common occurrence in practice. See Noreen & Soderstrom, “Are overhead costs strictly proportional to activity?” Journal of Accounting and Economics, vol. 17, 1994, pp. Second, the data points are all fairly to the straight line. This indicates that most of the variation in overhead expenses is explained by labor hours. As a consequence, there probably wouldn’t be much benefit to investigating other possible cost drivers for the overhead expenses. Third, most of the overhead expense appears to be fixed. Maria should ask herself if this is reasonable. Does the company have large fixed expenses such as rent, depreciation, and salaries? CASE 2A-5 (continued) The cost formula, in the form Y = a + bX, using labor-hours as the activity base is $48,126 per month plus $3.95 per labor-hour, or: Y = $48,126 + $3.95X. Note that the R2 is approximately 0.96, which means that 96% of the variation in cost is explained by labor-hours. This is a very high R2 which indicates a very good fit. 3. Using the least-squares regression estimate of the variable overhead cost, the total variable cost per guest is computed as follows:
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