CHAPTER 3

ACTIVITY COST BEHAVIOR

QUESTIONS FOR WRITING AND DISCUSSION
1. Knowledge of cost behavior allows a
manager to assess changes in costs that
result from changes in activity. This allows a
manager to assess the effects of choices
that change activity. For example, if excess
capacity exists, bids that at least cover
variable costs may be totally appropriate.
Knowing what costs are variable and what
costs are fixed can help a manager make
better bids.
2. The longer the time period, the more likely
that a cost will be variable. The short run is
a period of time for which at least one cost
is fixed. In the long run, all costs are
variable.
3. Resource spending is the cost of acquiring
the capacity to perform an activity, whereas
resource usage is the amount of activity
actually used. It is possible to use less of
the activity than what is supplied. Only the
cost of the activity actually used should be
assigned to products.
4. Flexible resources are those acquired from
outside sources and do not involve any
long-term commitment for any given
amount of resource. Thus, the cost of these
resources increases as the demand for
them increases, and they are variable costs
(varying in proportion to the associated
activity driver).
5. Committed resources are acquired by the
use of either explicit or implicit contracts to
obtain a given quantity of resources,
regardless of whether the quantity of
resource available is fully used or not. For
multiperiod commitments, the cost of these
resources essentially
corresponds to
committed fixed costs. Other resources
acquired in advance are short term in nature
and essentially correspond to discretionary
fixed costs.
6. Committed fixed costs are those incurred
for the acquisition of long-term activity
capacity and are not subject to change in
the short run. Annual resource expenditure
is independent of actual usage. For
example, the cost of a factory building is a

41

committed fixed cost. Discretionary fixed

costs are those incurred for the acquisition
of short-term activity capacity, the levels of
which can be altered quickly. In the short
run,
resource
expenditure
is
also
independent of actual activity usage. An
engineers salary is an example of such an
expenditure.
7. A variable cost increases in direct proportion
to changes in activity usage. A one-unit
increase in activity usage produces an
increase in cost. A step cost, however,
increases only as activity usage changes in
small blocks or chunks. An increase in cost
requires an increase in several units of
activity. When a step cost changes over
relatively narrow ranges of activity, it may
be more convenient to treat it as a variable
cost.
8. A step cost with narrow steps can be treated
as variable, while one with wide steps is
typically treated as fixed.
9. An activity rate is the resource expenditure
for an activity divided by the activitys
practical capacity.
10.

Mixed costs are usually reported in total in

the accounting records. How much of the
cost is fixed and how much is variable is
unknown and must be estimated.

11.

A scattergraph allows a visual portrayal of

the relationship between cost and activity. It
reveals to the investigator whether a
relationship may exist and, if so, whether a
linear function can be used to approximate
the relationship.

12.

Managers can use their knowledge of cost

relationships to estimate fixed and variable
components. A scattergraph can be used as
an aid in this process. From a scattergraph,
a manager can select two points that best
represent the relationship. These two points
can then be used to derive a linear cost
formula. The high-low method tells the
manager which two points to select to
compute the linear cost formula. The

selection of these two points is not left to

judgment.
13.

14.

Because the scatterplot method is not

restricted to the high and low points, it is
possible to select two points that better
represent the relationship between activity
and costs, producing a better estimate of
fixed and variable costs. The main
advantage of the high-low method is that it
removes subjectivity from the choice
process. The same line will be produced by
two different people.
Assuming that the scattergraph reveals that
a linear cost function is suitable, then the
method of least squares selects a line that
best fits the data points. The method also
provides a measure of goodness of fit so
that the strength of the relationship between
cost and activity can be assessed.

15.

The best-fitting line is the one that is

closest to the data points. This is usually
measured by the line that has the smallest
sum of squared deviations.

16.

No. The best-fitting line may not explain

much of the total cost variability. There must
be a strong relationship as well.

17.

The coefficient of determination is the

percentage of total variability in costs
explained

42

by the activity. As such, it is a measure of

the goodness of fit, the strength of the
relationship between cost and activity.
18.

The correlation coefficient is the square root

of the coefficient of determination. The
correlation coefficient reveals the direction
of the relationship in addition to the strength
of the relationship.

19.

If the variation in cost is not well explained

by activity usage (the coefficient of
determination is low) as measured by a
single driver, then other explanatory
variables may be needed to build a good
cost formula.

20.

If the mixed costs are immaterial, then the

method of decomposition is unimportant.
Furthermore,
sometimes
managerial
judgment may be more useful for assigning
costs than the use of formal statistical
methodology.

EXERCISES
31
1.

Number of Units
0
100,000
200,000
300,000
400,000
500,000

Total Cost
$240,000
240,000
240,000
240,000
240,000
240,000

2.

This depreciation cost is strictly fixed.

Cost per Unit

NA
$2.40
1.20
0.80
0.60
0.48

32
1.

Miles Traveled
0
5,000
10,000
15,000
20,000
25,000

Total Cost
$
0
6,500
13,000
19,500
26,000
32,500

Cost per Mile

$0.00
1.30*
1.30
1.30
1.30
1.30

*$5,200/4,000 or $26,000/20,000 = $1.30

2.

The cost of fuel for the delivery activity is strictly variable.

33
1.

Number of Units
0
10,000
20,000
30,000
40,000
50,000

Total Cost
$10,000
10,000
10,000
20,000
20,000
30,000

2.

Forming machines rental cost is a step cost.

43

Cost per Unit

NA
$1.00
0.50
0.67
0.50
0.60

34
Resource
Jet rental
Hotel rooms
Buffet
Favor package
Buses

Flexible/Committed
Committed
Committed
Flexible
Flexible
Committed

Cost Behavior
Fixed
Fixed
Variable
Variable
Step

35
1.

Resource
Plastic1
Direct labor and
variable overhead2
Mold sets3
Other facility costs4
Total

Total Cost
$ 10,800

Unit Cost
$0.027

8,000
20,000
10,000
$ 48,800

0.020
0.050
0.025
$0.122

0.90 $0.03 400,000 = $10,800; $10,800/400,000 = $0.027

$0.02 400,000 = $8,000; $8,000/400,000 = $0.02
3
$5,000 4 quarters = $20,000; $20,000/400,000 = $0.05
4
$10,000; $10,000/400,000 = $0.025
1
2

2.

Plastic, direct labor, and variable overhead are flexible resources; molds and
other facility costs are committed resources. The cost of plastic, direct labor,
and variable overhead are strictly variable. The cost of the molds is fixed for
the particular action figure being produced; it is a step cost for the
production of action figures in general. Other facility costs are strictly fixed.

44

36
1.

X-ray film and developing supplies are likely to vary with the number of
pacemakers produced. As production increases, we would expect more film
and developing supplies to be used. Inspectors and X-ray machines should
remain constant within the relevant range.

2.

Total cost = $310,000 + ($1.60 100,000) = $470,000

Total fixed cost = $310,000
Total variable cost = $1.60 100,000 = $160,000

3.

Unit cost = $470,000/100,000 = $4.70 per pacemaker

4.

Unit fixed cost = $310,000/100,000 = $3.10 per pacemaker

5.

Unit variable cost = $1.60 per pacemaker

6.

a. $438,000/80,000 = $5.48; $310,000/80,000 = $3.88; $1.60

b. $502,000/120,000 = $4.18; $310,000/120,000 = $2.58; $1.60
The unit cost increases in the first case and decreases in the second case.
This is attributable to spreading fixed costs over fewer units of activity output
in the first case and over more units in the second case. The unit variable
cost stays constant.

45

37
1.

Committed resources: trucks and technicians salaries

Flexible resources: supplies, small tools, and fuel

2.

Variable activity rate = $840,000/70,000 = $12 per call

Fixed activity rate = $1,200,000*/80,000 = $15 per call
Total cost of one call = $12 + $15 = $27 per call
*($26,250 40) + ($6,000 25)

3.

Activity availability =
Calls available
=
80,000 calls
=

4.

Total cost of
committed resources
$1,200,000
$1,200,000

Activity usage
Calls made
70,000 calls

+ Unused capacity
+
Unmade calls
+
10,000 calls

Cost of
= activity used +
= ($15 70,000) +
=
$1,050,000
+

Cost of
unused capacity
($15 10,000)
$150,000

Note: The analysis is restricted to committed resources, since only these

resources will ever have any unused capacity.

46

38
1.

Committed resource charges: monthly fee, activation fee, cancellation fee (if
triggered by contract cancellation prior to one year)
Flexible resource charges: all additional charges for airtime, long distance
and roaming

2.

Plan 1:
Minutes available
60 minutes

=
=

Minutes used
45 minutes

+
+

Unused minutes
15 minutes

Plan 2:
Minutes available
120 minutes

=
=

Minutes used
45 minutes

+
+

Unused minutes
75 minutes

Plan 1 is more cost effective. Jana will have some unused capacity (on
average, 15 minutes a month), and the overall cost will be lower by $10 per
month.
3.

Plan 1*:
Minutes available
60 minutes

=
=

Minutes used
90 minutes

+
+

Unused minutes
( 30) minutes

Plan 1*:
Minutes available
=
60 minutes
=
Additional minutes =

Minutes used
60 minutes
30 minutes

+
+

Unused minutes
0 minutes

*There are a number of ways to illustrate the use of minutes with Plan 1. Here
are two possibilities. The problem, of course, is that all included monthly
minutes are used, and Jana must purchase additional minutes.
Plan 2:
Minutes available
120 minutes

=
=

Minutes used
90 minutes

+
+

Unused minutes
30 minutes

Plan 2 is now more cost effective, as the monthly cost is $30. Under Plan 1,
Jana will pay $20 plus $30 (30 minutes $1.00) or $50 per month. (The $1.00
additional charge includes the airtime and regional roaming charge.)

47

39
1.

Cost of Oil Changes

$9,000
$8,000
$7,000

Cost

$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
0

500

1,000

Number of Oil Changes

The scattergraph provides evidence for a linear relationship.
2.

High (1,400, $7,950); Low (700, $5,150)

V = ($7,950 $5,150)/(1,400 700)
= $2,800/700 = $4 per oil change
F = $5,150 $4(700)
= $5,150 $2,800 = $2,350
Cost = $2,350 + $4 (oil changes)
Predicted cost for January = $2,350 + $4(1,000) = $6,350

48

1,500

39

Concluded

3. Output of the regression routine calculated by a spreadsheet:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

1697.097
243.6784
0.967026
8
6
4.64678
0.350304

Rounding the coefficients:

Variable rate = $4.65 per oil change
Fixed cost = $1,697
Predicted cost for January = $1,697 + $4.65 (oil changes)
= $1,697 + $4.65(1,000) = $6,347
R2 = 0.97 (rounded)
This says that 97 percent of the variability in the cost of providing oil changes
is explained by the number of oil changes performed.
4.

The least-squares method is better because it uses all eight data points
instead of just two.

49

310
1.

Cost

Cost of Moving Materials

$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
0

500

1,000

Number of Moves
The scattergraph provides evidence for a linear relationship, but the
observation for 300 moves may be an outlier.
2.

High (800, $14,560); Low (100, $3,000)

V = ($14,560 $3,000)/(800 100)
= $11,560/700 = $16.51 per move (rounded)
F = $3,000 $16.51(100)
= $3,000 $1,651 = $1,349
Cost = $1,349 + $16.51 (moves)
Predicted cost = $1,349 + $16.51(550) = $10,430 (rounded)

50

310

Concluded

3. Output of the regression routine calculated by a spreadsheet:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

497.50
987.0073
0.926208
8
6
18.425
1.954566

Rounding the coefficients:

Variable rate = $18.43 per move
Fixed cost = $498
Cost = $498 + $18.43 (moves)
= $498 + $18.43(550) = $10,635 (rounded)
R2 = 0.93 (rounded)
This says that 93 percent of the variability in the cost of moving materials is
explained by the number of moves.
4.

Normally, we would prefer the least-squares method since the data appear to
be linear. However, the third observation may be an outlier. If the third
observation (300 moves and $3,400 of cost) is dropped, the R 2 rises to 99
percent. The new cost formula would be
Cost = $1,411 + $17.28 (moves)
The higher fixed cost is much more in keeping with what we observed with
the scatterplot in requirement 1.

51

311
1.

Independent variable = number of inspections;

Dependent variable = inspection cost
High point (500, $10,000); low point (100, $6,200)

2.

Variable rate = ($10,000 $6,200)/(500 100) = $3,800/400 = $9.50 per inspection

Fixed cost = $10,000 ($9.50)(500) = $5,250
Formula for inspection cost = $5,250 + $9.50X
Estimated inspection cost = $5,250 + $9.50(280) = $7,910

3. Output of regression routine using spreadsheet program:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom

5370
367.0967
0.958144
5
3

X Coefficient(s)
Std. Err. of Coef.

9.62
1.160862

Variable rate = $9.62 per hour

Fixed cost = $5,370
Formula for setup cost = $5,370 + $9.62X
Estimated setup cost = $5,370 + $9.62(280) = $8,064 (rounded)
R2 = 0.958 or 95.8%
The coefficient of determination is highindicating a strong relationship
between inspection cost and the number of inspections.

52

312
1.

Depreciation:
Variable rate = ($170,000 $170,000)/(48,000 24,000) = 0
Fixed cost = $170,000 $0(24,000) = $170,000
Depreciation = $170,000
Depreciation is purely fixed.
Power usage:
Variable = ($16,320 $8,160)/(48,000 24,000) = $0.34
Fixed cost = $8,160 $0.34(24,000) = $0
Power usage = $0.34(machine hours)
Power usage is purely variable.
Maintenance:
Variable rate = ($149,000 $101,000)/(48,000 24,000) = $2.00
Fixed cost = $101,000 $2.00(24,000) = $53,000
Maintenance = $53,000 + $2.00(machine hours)
Maintenance is a mixed cost.

2.

Depreciation = $170,000
Power usage = $0.34(32,000) = $10,880
Maintenance = $53,000 + $2.00(32,000) = $117,000

3.

Machine related overhead = Depreciation + Power usage + Maintenance

= $170,000 + $0.34(MHr) + $53,000 + $2.00(MHr)
= $223,000 + $2.34(MHr)
For 32,000 machine hours:
Machine-related overhead = $223,000 + $2.34(32,000)
= $223,000 + $74,880 = $297,880
Cost formulas can be combined if the activities they describe share a
common objective and if the activity driver is the same. If the activities are
not logically related, then it may not be wise to combine cost formulas even if
they have a common driver.

53

313
1.

Maintenance cost = $5,750 + $16X

2.

Maintenance cost = $5,750 + $16(650) = $5,750 + $10,400 = $16,150

3.

To obtain the percentage explained, r needs to be squared: 0.89 0.89 = 79.21

percent. The relationship appears strong but perhaps could be improved by
searching for another explanatory variable. Leaving about 20 percent of the
variability unexplained may produce less than satisfactory predictions.

4.

Maintenance cost = 12($5,750) + $16(8,400) = $69,000 + $134,400 = $203,400

Note: The fixed cost from the regression results is the fixed cost for the
month (since monthly data were used to estimate the equation). However, the
question asks for the cost for the year. Therefore, the fixed cost from the
regression equation must be multiplied by 12.

314
1.

Overhead = $2,130 + $17(DLH) + $810(setups) + $26(purchase orders)

2.

Overhead = $2,130 + $17(600) + $810(50) + $26(120)

= $2,130 + $10,200 + $40,500 + $3,120
= $55,950

3.

Since total setup cost is $40,500 for the following month, a 50 percent
decrease would reduce setup cost to $20,250, saving $20,250 for the month.

54

315
1.

Warranty repair cost = $2,000 + $60(number of defects) $10(inspection

hours)

2.

Warranty repair cost = $2,000 + $60(100) $10(150) = $6,500

3.

The number of defects is positively correlated with warranty repair costs.

Inspection hours are negatively correlated with warranty repair costs.

4.

In this equation, the independent variablesnumber of defects and

inspection hoursaccount for 88 percent of the variability in warranty repair
costs. It seems that analysts have identified some very good drivers for
warranty repair costs.

316
1.

Independent variable = direct labor hours; dependent variable = overhead

cost
High point (1,300, $35,200); low point (800, $23,370)
Note: The high point is the point of highest direct labor hours (the
independent variable), not the highest cost (which is for Month 7 in this case).

2.

Variable rate = ($35,200 $23,370)/(1,300 800)

= $11,830/500 = $23.66 per direct labor hour
Fixed cost = $35,200 ($23.66)(1,300) = $4,442
Formula for overhead cost = $4,442 + $23.66 (direct labor hours)
Estimated overhead cost = $4,442 + $23.66(1,120) = $30,941 (rounded)

55

316

Concluded

3. Output of regression routine using spreadsheet program:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom

3132.136
2273.337
0.950539
10
8

X Coefficient(s)
Std. Err. of Coef.

25.20682
2.0322010

Variable rate = $25.21 per direct labor hour

Fixed cost = $3,132
Formula for overhead cost = $3,132 + $25.21 (direct labor hours)
Estimated overhead cost = $3,132 + $25.21(1,120) = $31,367 (rounded)
R2 = 0.95, or 95%
The coefficient of determination is highindicating a strong relationship
between overhead cost and direct labor hours.

317
1.
2.
3.
4.
5.

a
c
a
e
e

56

PROBLEMS
318
1.

Salaries:
Senior accountantfixed
Office assistantfixed
Internet and software subscriptionsmixed
Consulting by senior partnervariable
Depreciation (equipment)fixed
Suppliesmixed
Administrationfixed
Rent (offices)fixed
Utilitiesmixed

2. Internet and software subscriptions:

V = (Y2 Y1)/(X2 X1)
= ($850 $700)/(150 120) = $5 per hour
F = Y2 VX2
= $850 ($5)(150) = $100
Consulting by senior partner:
V = (Y2 Y1)/(X2 X1)
= ($1,500 $1,200)/(150 120) = $10 per hour
F = Y2 VX2
= $1,500 ($10)(150) = $0
Supplies:
V = (Y2 Y1)/(X2 X1)
= ($1,100 $905)/(150 120) = $6.50 per hour
F = Y2 VX2
= $1,100 ($6.50)(150) = $125
Utilities:
V = (Y2 Y1)/(X2 X1)
= ($365 $332)/(150 120) = $1.10 per hour
F = Y2 VX2
= $365 ($1.10)(150) = $200

57

318

Concluded

3.
Fixed
Salaries:
Senior accountant
Office assistant
Internet and subscriptions
Consulting
Depreciation (equipment)
Supplies
Administration
Rent (offices)
Utilities
Total cost

Unit
Variable Cost

$2,500
1,200
100

2,400
125
500
2,000
200
$9,025

5.00
10.00

6.50

1.10
$22.60

Thus, total clinic cost = $9,025 + $22.60/professional hour

For 140 professional hours:
Clinic cost = $9,025 + $22.60(140) = $12,189
Charge per hour = $12,189/140 = $87.06
Fixed charge per hour = $9,025/140 = $64.46
Variable charge per hour = $22.60
4.

For 170 professional hours:

Charge/day = $9,025/170 + $22.60 = $53.09 + $22.60 = $75.69
The charge drops because the fixed costs are spread over more professional
hours.

58

319
1.

High (1,700, $21,000); Low (700, $15,000)

V = (Y2 Y1)/(X2 X1)
= ($21,000 $15,000)/(1,700 700) = $6 per receiving order
F = Y2 VX2
= $21,000 ($6)(1,700) = $10,800
Y = $10,800 + $6X

2. Output of spreadsheet regression routine with number of receiving orders as

the independent variable:
Constant

4512.98701298698

Std. Err. of Y Est.

R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

3456.24317476605
0.633710482694768
10
8
13.3766233766234
3.59557461331427

V = $13.38 per receiving order (rounded)

F = $4,513 (rounded)
Y = $4,513 + $13.38X
R2 = 0.634, or 63.4%
Receiving orders explain about 63.4 percent of the variability in receiving
cost, providing evidence that Tracys choice of a cost driver is reasonable.
However, other drivers may need to be considered because 63.4 percent may
not be strong enough to justify the use of only receiving orders.

59

319

Continued

3. Regression with pounds of material as the independent variable:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

5632.28109733183
2390.10628259277
0.824833789433823
10
8
0.0449642991356633
0.0073259640055344

V = $0.045 per pound of material delivered (rounded)

F = $5,632 (rounded)
Y = $5,632 + $0.045X
R2 = 0.825, or 82.5%
Pounds of material delivered explains about 82.5 percent of the variability in
receiving cost. This is a better result than that of the receiving orders and
should convince Tracy to try multiple regression.

60

319
4.

Concluded

Regression routine with pounds of material and number of receiving orders

as the independent variables:
Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.
V1
V2
F
Y

752.104072925631
1350.46286973443
0.951068418023306
10
7
0.0333883151096915
0.00495524841198368

7.14702865269395
1.68182916088492

= $0.033 per pound of material delivered (rounded)

= $7.147 per receiving order (rounded)
= $752 (rounded)
= $752 + $0.033a + $7.147b

R2 = 0.95, or 95%
Multiple regression with both variables explains 95 percent of the variability
in receiving cost. This is the best result.

320
1.

The order should cover the variable costs described in the cost formulas.
These variable costs represent flexible resources.
Materials ($94 20,000)
Labor ($16 20,000)
Variable overhead ($80 20,000)
Variable selling ($7 20,000)
Total additional resource spending
Divided by units produced
Total unit variable cost

$ 1,880,000
320,000
1,600,000
140,000
$ 3,940,000

20,000
$
197

Garner should accept the order because it would cover total variable costs
and increase income by $15 per unit ($212 $197), for a total increase of
$300,000.

61

320

Concluded

2.

The correlation coefficients indicate the reliability of the cost formulas. Of the
four formulas, overhead activity may be a problem. A correlation coefficient
of 0.75 means that only about 75 percent of the variability on overhead cost is
explained by direct labor hours. This should have a bearing on the answer to
Requirement 1 because if the percentage is low, there are activity drivers
other than direct labor hours that are affecting variability in overhead cost.
What these drivers are and how resource spending would change need to be
known before a sound decision can be made.

3.

Resource spending attributable to order:

Material ($94 20,000)
Labor ($16 20,000)
Variable overhead:
($85 20,000)
($5,000 12)
($300 600)
Variable selling ($7 20,000)
Total additional resource spending
Divided by units produced
Total unit variable cost

$ 1,880,000
320,000
1,700,000
60,000
180,000
140,000
$ 4,280,000

20,000
$
214

The order would not be accepted now because it does not cover the variable
activity costs. Each unit would lose $2 ($212 $214).
It would also be useful to know the step-cost functions for any activities that
have resources acquired in advance of usage on a short-term basis. It is
possible that there may not be enough unused activity capacity to handle the
special order, and resource spending may also be affected by a need (which,
in this case, would be unexpected) to expand activity capacity.

62

321
1.

High (2,000; $120,000); Low (1,200; $52,000)

V = ($120,000 $52,000)/(2,000 1,200) = $85/nursing hour
F = $52,000 ($85 1,200) = $50,000
This problem illustrates how the high-low method can be misleading when
cost behavior patterns have changed. Fortunately, in this case, the negative
value of fixed cost tells us that something is wrong.

2. a. Output of spreadsheet multiple regression routine:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

236.211171346831
1788.59942408259
0.993939842186014
14
11
40.8752113255057
2.2207348945557

35307.5122042085
970.201096681915

b. Output of spreadsheet regression routine on 2005 data:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

10081.3333333337
94.8068211329403
0.999887905585866
8
6
34.9533333333331
0.151087766637518

63

321

Concluded

c. Output of spreadsheet regression routine on 2006 data:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

19964.2403242688
12.0521931978647
0.999999089146329
6
4
50.0216788702923
0.0238700194326353

While each regression has a high R 2, the multiple regression gives

unacceptable results. Notice the $35,308 coefficient on the independent
variable changes. Yet, the increased fixed cost was only $10,000 per month.
Regression (c) gives more reasonable results. The intercept term, $19,964, is
roughly $10,000 higher than the intercept term for Regression (b), as
expected. So, the hospital should use Regression (c) to budget for the rest of
the year.

322
1.

Output of spreadsheet regression with setup hours as independent variable:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

2498.64388489202
285.68025751244
0.931469268038633
9
7
2.50691546762592
0.257009448534317

Budgeted setup cost at 2,600 setup hours:

Y = $2,499 + $2.51(2,600)
= $9,025

64

322
2.

Continued

Output of spreadsheet regression with number of setups as the independent

variable:
Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

8742.90441176471
1084.01688314397
0.0132730147072237
9
7
6.05073529411757
19.7184534227446

Budgeted setup cost for 80 setups:

Y = $8,743 + $6.05(80)
= $9,227
3.

The regression equation based on setup hours is better because the

coefficient of determination is much higher. Setup hours explain about 93
percent of the variation in setup costs, while number of setups explains only
1.3 percent of the variation in setup costs.

65

322
4.

Concluded

Output of spreadsheet for multiple regression:

Constant
Std. Err. of Y Est.
R Squared
No. of Observations
Degrees of Freedom
X Coefficient(s)
Std. Err. of Coef.

1493.26459143964
49.8369756378367
0.998212354162525
9
6
2.60557879377433
0.0453173582286768

13.7142023346307
0.916289112797867

Y = $1,493.27 + $2.61(2,600) + $13.71(80)

= $9,376.07
The explanatory power of both variables is very high. Yet, setup hours seems
to explain most of the variation, and the use of one driver would vastly
simplify budgeting and product costing. The increased complexity is
probably not worth adding the second driver.

66

MANAGERIAL DECISION CASE

323
1.

Jackie violated the standard of confidentiality. Management accountants

should not disclose confidential information acquired in the course of their
work unless legally obligated to do so. Her motives for disclosing the
confidential information apparently were intended to further her personal
interests. Management accountants are prohibited from using confidential
information for unethical advantages. In addition, some could argue that
Jackie also violated the standard of integrity. Conflict of interest, receipt of
favors or gifts, and subversion of an organizations pursuit of its legitimate
objectives all could be in violation.

2.

Assuming that the data were acquired illicitly, Brindons instincts were on
target. To analyze the data and be party to its use would most certainly
violate the standard of integrity. Management accountants should not engage
in or support any activity that would discredit the profession. In addition,
Brindon would violate the standard of confidentiality if he chose to analyze
the data. Management accountants should refrain from using confidential
information acquired in the course of their work for unethical advantage,
either personally or through a third party (II-3).

RESEARCH ASSIGNMENT
324
Answers will vary.

67