Question

Method of Least Squares, Developing and Using the Cost Formula The method of least squares was...

Method of Least Squares, Developing and Using the Cost Formula

The method of least squares was used to develop a cost equation to predict the cost of receiving purchased parts at a video game manufacturer. Ninety-six data points from monthly data were used for the regression. The following computer output was received:

Intercept 147,400
Slope 210

The cost driver used was number of parts inspected.

Required:

1. What is the cost formula?

Total cost of receiving = $ + ( $ × )

2. Using the cost formula from Requirement 1, identify each of the following: independent variable, dependent variable, Variable rate per professional hour, and fixed cost per month.

Independent variable
Dependent variable
Variable rate per professional hour per part inspected
Fixed cost per month

3. Using the cost formula, predict the cost of receiving for a month in which 6,800 parts are inspected.

Total cost of receiving = $

Business   Accounting   
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Homework Answers

Answer #1

(1) Cost Formula : Fixed Cost ( Intercept)+ No of Pieces Inspected X Variable Cost i.e. Slope

= $147400+$210*No of Parts Inspected

(2) Independent Varibale = slope i.e. cost of inspecting 1 part

Dependent Variable = Total Monthly Cost

Variable Rate per professional hour = 210 ( i.e. variable cost of inspecting 1 part) / number of hours taken in inspecting 1 part

Total Fixed Cost = 147400

(3) Cost of Receiving 6800 parts = 147400+210*6800= 1,575,400

where FC = 147400 , VC = 210 , No of parts = 6800

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