3/7/2018 Chapter 6 Linear Regression Using Excel 2010

Linear regression is a method of estimating the portion of a cost that is variable and the portion
that is fixed. This method models the relationship between an activity and the total cost by fitting a
linear equation to the data. Unlike the high-low method which uses only two data points, linear
regression uses all data points in constructing the cost equation, making it much superior to the
high-low method. A linear regression generates information for a cost equation in the same form
as the other methods of estimating costs: Y = VCx + TFC, where 'x' is the independent variable
(the activity) and 'Y' is the total cost (dependent variable).

While there are several software programs that generate linear regressions, using Excel� is
relatively easy and is a business tool frequently used by managers. It is also a business tool that is
installed on the majority of home and business computers. As such, you will learn how to run
(generate) a regression using Excel�.1

Interpreting the Regression Output

While a number of statistical items are generated in the regression output, your primary interest is
the components of the cost function found in the last section of the summary output. Linear
regression output for a home moving company that packs and moves residents to new homes
appears below.

Intercept is the y-intercept which is the estimate of total fixed costs for each period. X Variable 1
represents the estimated variable cost per unit, or the slope of the cost equation. The cost
equation for the moving company is:
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Y = 3,815.69x + 828,814

We read this formula as 'Total cost equals variable cost of $3,815.69 times the number of
residences moved plus fixed costs of $828,814'. Always express unit costs (i.e., the unit variable
cost) with two decimals, and total costs (fixed costs) with no decimals.

Is the Data 'Good'?

A scatter graph is often prepared prior to running a regression to pre-assess the relationship
between two variables. A weak or nonexistent relationship between the activity and the total cost
indicates that the linear regression output will not provide a useful cost equation. Assessing the
quality of the cost equation (regardless of the cost estimation used) is beyond the scope of
managerial accounting. As such, you will focus solely on generating a cost equation and how to
use it to estimate future costs.

Data Analysis ToolPak

To use the linear regression tool in Excel, the Data Analysis Toolpak must be installed. To verify if
it is installed, click Data from the Excel� menu. If you see the Data Analysis command in the
Analysis group (far right), the Data Analysis Toolpak is already installed. If it is not installed, follow
the directions in the Appendix at the end of this chapter to install it.

Walk Through Problem

Wilson Company provided the following information concerning the number of monthly service calls
provided and the total cost incurred for its pest control operations for the each month during 2016:

Number of
Year Total Cost
Service Calls
January 1,040 $33,600
February 1,200 36,300
March 1,260 37,800
April 1,100 35,500
May 1,220 36,600
June 1,010 32,900
July 1,190 36,200
August 1,050 33,400
September 1,210 37,700
October 1,250 37,400
November 1,060 33,800
December 1,280 38,100

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3/7/2018 Chapter 6 Linear Regression Using Excel 2010

Run a linear regression using the regression tool in Excel�. Write the cost equation in standard
form. Determine the estimated cost of providing 1,140 service calls for January, 2017.

Solution

Step 1: Open the Excel� program. Copy and paste the data for Wilson Company into
columns A, B, and C beginning in row 1 of a blank worksheet.

Step 2: Because the regression output occupies 9 columns and 13 rows, to avoid
placing the regression output on top of your data, select a location in the worksheet in
which there are enough empty rows and columns to accommodate the output. Place
your mouse pointer in cell A15 since that is an acceptable location.

Step 3: Select the Data ribbon menu, then Data Analysis command on the Analysis
tab. A popup box will appear. Scroll down and select Regression. Click OK.

Step 4: The Regression wizard will be displayed. In the Input Y Range field, select all
the values in the total cost column of the data table---cells C2 through C13. Do not
select the total.

Step 5: In the Input X Range field, select all the activity values---cells B2 to B13 in the
same manner as Step 4.

Step 6: In the Output Range field, select cell A15 so that the regression output will
begin in that cell

Step 7: Verify you have no checks in all remaining boxes. Your wizard should be
identical to the graphic below:

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Step 8: Click OK to 'run' the regression. Verify your output appears as follows, noting
that the column widths may differ based on your worksheet settings.

Step 9: Write the cost formula based on the regression output as:

Y = 19.08x + 13,720

The total cost is $13,720 plus $19.08 times the number of service calls. Always
express unit costs (i.e., the variable cost) with two decimals, and total costs (fixed

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costs) with no decimals.

Step 10: The total cost expected if 1,140 service calls are made is:

Y = (19.0812465 x 1,140) + 13,720.2593 = $35,473

Appendix - How to Install the Data Analysis Tool Pak

Open Excel 2010. Choose the Data tab from the menu ribbon in Excel. If there is no Data Analysis
item on the ribbon (look to the far right), follow the steps below to install.

1. Click the File menu option, and then click Options.

2. Click Add-Ins, and then in the Manage box (near the bottom), select Excel Add-ins.

3. Click Go.

4. In the Add-Ins available section, select the Analysis ToolPak check box, and then click OK.
If Analysis ToolPak is not listed in the Add-Ins available box, click Browse to locate it. If you
get prompted that the Analysis ToolPak is not currently installed on your computer, click Yes
to install it.

5. You will be immediately returned to your original worksheet. Click the Data tab from the menu
ribbon and you will see the Data Analysis option on the Analysis tab at the far right.

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This chapter explains how to run a regression using Excel 2010. Directions for other versions of Excel may differ.

This page was last edited on Sunday January 18, 2015 04:18 PM
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