The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed thus, they must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past eight quarters have been collected: 2 25000 38000 3 30000 42500 4 22000 35000 5 21000 34000 6 18000 31400 7 24000 36000 8 28000 42000 Prompt Work with your group members to answer the following prompts: Prepare a scattergraph by plotting power costs against machine hours. Does the scattergraph show a linear relationship between machine hours and power cost? Use scattergraph method to draw a cost line that best fits the data and estimate the cost function. Using high and low method, compute a power cost formula. Will your answer change if the power cost for Quarter8 is $42,600? Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination. Rerun the regression and drop the point (20,000; $26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better?
The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed thus, they must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past eight quarters have been collected: 2 25000 38000 3 30000 42500 4 22000 35000 5 21000 34000 6 18000 31400 7 24000 36000 8 28000 42000 Prompt Work with your group members to answer the following prompts: Prepare a scattergraph by plotting power costs against machine hours. Does the scattergraph show a linear relationship between machine hours and power cost? Use scattergraph method to draw a cost line that best fits the data and estimate the cost function. Using high and low method, compute a power cost formula. Will your answer change if the power cost for Quarter8 is $42,600? Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination. Rerun the regression and drop the point (20,000; $26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed;
thus, they must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past eight quarters have been
collected:
2 25000
38000
3 30000 42500
4 22000 35000
5 21000 34000
6 18000 31400
7 24000 36000
8 28000 42000
Prompt
Work with your group members to answer the following prompts:
Prepare a scattergraph by plotting power costs against machine hours. Does the scattergraph show a linear relationship between machine hours and power cost? Use scattergraph method to draw a cost line that best fits the data and estimate the cost function.
Using high and low method, compute a power cost formula. Will your answer change if the power cost for Quarter8 is $42,600?
Use the method of least squares to compute a power cost formula. Evaluate the coefficient of determination.
Rerun the regression and drop the point (20,000; $26,000) as an outlier. Compare the results from this regression to those for the regression in Requirement 3. Which is better?
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