Theactivit yo f inspect ion appears tobemoreclosely

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Unformatted text preview: ppears to be reasonably small. This indicates that advertising costs are related to restaurant revenues. Slope of regression line. The slope o f the regressio n line appears to be relat ively steep. Given the small scatter of the observat ions around the line, the steep slope indicates that, on average, restaurant revenues increase wit h newspaper advertising. 10­22 3. The high­low method would est imate the cost function as fo llows: Advertising Costs Highest observat ion of cost driver $4,000 Lowest observat ion of cost driver 1,000 Difference $3,000 Revenues = a + (b ´ advertising costs) Slope coefficient (b) Constant (a) = $25,000 = 8.333 $3,000 Revenues $80,000 55,000 $25,000 = $80,000 - ($4,000 ´ 8.333) = $80,000 - $33,332 = $46,668 or Constant (a) = $55,000 - ($1,000 ´ 8.333) = $55,000 - $8,333 = $46,667 Revenues 4. = $46,667 + (8.333 ´ Advertising costs) The increase in revenues for each $1,000 spent on advert ising wit hin the relevant range is a. Using the regressio n equat ion, 8.723 ´ $1,000 = $8,723 b. Using the high­low equat ion, 8.333 ´ $1,000 = $8,333 The high­low equat ion does fairly well in estimat ing the relat ionship between advertising costs and revenues. However, Martinez should use the regressio n equation because it uses informat ion fro m all observat ions. The high­low method, on the other hand, relies only on the observat ions that have the highest and lowest values o f the cost driver and these observat ions are generally not representative of all the data. 10­23 10­34 (30 min.) Regression, activity­based costing, choosing cost drivers. 1. Both number of units inspected and inspect ion labor­hours are plausible cost drivers for inspection costs. The number of units inspected is likely related to test­kit usage, which is a significant component of inspection costs. Inspection labor­hours are a plausible cost driver if labor hours vary per unit inspected, because costs would be a funct ion of how much time the inspectors spend on each unit. Th...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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