Question

Flexible Budget, Multiple Regression

The controller for Muir Company's Salem plant is analyzing overhead in order to determine appropriate drivers for use in flexible budgeting. She decided to concentrate on the past 12 months since that time period was one in which there was little important change in technology, product lines, and so on. Data on overhead costs, number of machine hours, number of setups, and number of purchase orders are in the following table.

Month	Overhead Costs	Machine Hours	Number of Setups	Number of Purchase Orders
January	$ 32,296	1,000	20	216
February	31,550	930	18	250
March	36,280	1,100	21	300
April	36,867	1,050	23	270
May	36,790	1,170	22	285
June	37,800	1,200	25	240
July	40,024	1,235	27	237
August	39,256	1,190	24	303
September	33,800	1,070	20	255
October	33,779	1,210	22	195
November	37,225	1,207	23	270
December	27,500	1,084	15	150
Totals	$423,167	13,446	260	2,971

Required:

1. Run a multiple regression equation using machine hours, number of setups, and number of purchase orders as independent variables. Prepare a flexible budget for overhead for the 12 months using the results of this regression equation. (Round the regression coefficients to the nearest cent and predicted overhead to the nearest dollar.)

If there is no variance, enter "0" for the amount and select "NA" in the last column. Enter all your answers as positive amounts.

Muir Company Flexible Budget for Overhead
Month	Predicted Overhead	Actual Overhead	Variance
January	$	$	$
February
March
April
May
June
July
August
September
October
November
December
Totals	$	$	$

2. Now, suppose that the controller remembers that the factory throws two big parties each year, one for the 4th of July and the other for Christmas. Rerun the multiple regression with machine hours, number of setups, and number of purchase orders, and add a dummy variable called “Party.” (This variable takes the value one for months with a factory-sponsored party, and zero otherwise.) Prepare a flexible budget for the 12 months using the results of this regression. (Round the regression coefficients to the nearest cent and each predicted overhead amount to the nearest dollar.)

If there is no variance, enter "0" for the amount and select "NA" in the last column. Enter all your answers as positive amounts.

Muir Company Flexible Budget for Overhead
Month	Predicted Overhead	Actual Overhead	Variance
January	$	$	$
February
March
April
May
June
July
August
September
October
November
December
Total	$	$	$

Answer 1

Answer:1 Overhead rate=Total overhead cost/Total estimated machine hours
=$423167/13446
=$31.47 per hour
Month	Machine hours	Predicted overhead	Actual Overhead	Variance	Type F or U
Jan	1000	31470	32296	-826	U
Feb	930	29267.1	31550	-2282.9	U
Mar	1100	34617	36280	-1663	U
Apr	1050	33043.5	36867	-3823.5	U
May	1170	36819.9	36790	29.9	F
Jun	1200	37764	37800	-36	U
Jul	1235	38865.5	40024	-1158.6	U
Aug	1190	37449.3	39256	-1806.7	U
Sep	1070	33672.9	33800	-127.1	U
Oct	1210	38078.7	33779	4299.7	F
Nov	1207	37984.3	37225	759.29	F
Dec	1084	34113.5	27500	6613.48	F
Total	13446	423146	423167	-21.38	U
Answer2:
Overhead cost= $8699.64+ $23.71(machine hours)
Month	Machine hours	Predicted overhead	Actual Overhead	Variance	Type F or U
Jan	1000	32410	32296	114	F
Feb	930	30750	31550	800	U
Mar	1100	34781	36280	1499	U
Apr	1050	33595	36867	3272	U
May	1170	36440	36790	350	U
Jun	1200	37152	37800	648	U
Jul	1235	37981	40024	2043	U
Aug	1190	36915	39256	2341	U
Sep	1070	34069	33800	269	F
Oct	1210	37389	33779	3610	F
Nov	1207	37318	37225	93	F
Dec	1084	34401	27500	6901	F
Total	13446	423201	423167	34	F