Class 25
Fall 2009
Additional Study Questions
Applications of Regression Analysis
You will need to run regressions for several of the problems that follow.
You can download the data sets from the
course web page.
Regressions and other statistical analyses can be run using Excel, using the data analysis
feature in the “Tools” menu.
Some of these questions may involve more detail than we will be able to cover in class --- if it doesn’t sound
familiar, we probably didn’t do it, but you can always ask if you’re unsure of whether you are responsible for
some material or not.
1.
Activity Drivers (download “AdditionalStudyQuestions_Data” and use “Activity Driver Data” sheet)
Source:
Randy Harris, controller, has been given the charge to implement an advanced cost management system. As
part of this process, he needs to identify activity drivers for the activities of the firm. During the past four
months. Randy has spent considerable effort identifying activities, their associated costs, and possible drivers
for the activities' costs.
Initially, Randy made his selections based on his own judgment using his experience and input from
employees who perform the activities. Later, he used regression analysis to confirm his judgment. Randy
prefers to use one driver per activity, provided that an R
2
of at least 80 percent can be produced. Otherwise,
multiple drivers will be used, based on evidence provided by multiple regression analysis. For example, the
activity of inspecting finished goods produced an R
2
of less than 80 percent for any single activity driver.
Randy believes, however, that a satisfactory cost formula can be developed using two activity drivers:
the
number of batches and the number of inspection hours.
Data collected for a fifteen-month period are provided below (this data is on the spreadsheet on the web):
Inspection Cost
Hours of Inspection
Number of Batches
17,689
100
10
18,350
120
20
13,125
60
15
28,000
320
30
30,560
240
25
31,755
200
40
40,750
280
35
29,500
230
22
47,570
350
50
36,740
270
45
43,500
350
38
26,780
200
18
28,500
140
28
17,000
160
14
Required:
(a)
Calculate the cost formula for inspection costs using the two drivers, inspection hours, and number of
batches. Are both activity drivers useful? What does the R
2
indicate about the formula?
(b) Using the formula developed in Requirement (a), calculate the inspection cost when 300 inspection hours
are used and 30 batches are produced.
Prepare a 90 percent prediction interval.
(c) Using the formula developed in Requirement (a), calculate the inspection cost for the following two
months.
In which prediction should you have greater confidence?
Why?
°
Month A: