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Low cost
( )
$7,500 $13.75(500)
$625
Y F V X
F
F
High cost
24
Scatterplot Method
Step 1: Plot the data points on a scattergraph
25
Scatterplot Method
Step 2: Choose the two data points most representative
of the data to describe the cost behavior line
26
Method of Least Squares
Actual
Cost
Predicted
Cost Deviation
Deviation
Squared
2,000 1,742 258 66,564
3,090 2,088 1,002 1,004,004
2,780 2,780 - -
1,990 3,126 (1,136) 1,290,496
7,500 7,278 222 49,284
5,300 4,510 790 624,100
4,300 3,818 482 232,324
6,300 5,894 406 164,836
5,600 6,932 (1,332) 1,774,224
6,240 6,240 - -
5,205,832 Total measure of closeness
27
Regression Programs
The best-fitting line is the line with the
smallest sum of squared deviations
Regression analysis determines the linear
function with the minimum sum of squared
deviations
Utilize spreadsheet packages such as
Microsoft Excel to perform the
computation
28
Spreadsheet Data for
Anderson Company
Regression Analysis
for the Method of Least Squares
29
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.92894908
R. Square 0.862946394
Adjusted R 0.845814693
Square
Standard Error 770.4987038
Observations 10
ANOVA
df SS MS F
Regression 1 29903853.98 29903853.98 50.37132077
Residual 8 4749346.021 593668.2526
Total 9 34653200
Coefficient Standard Error t-Stat P-value
Intercept 854.4993582 569.7810263 1.49967811 0.172079925
X Variable 1 12.3915276 1.745955536 7.097275588 0.000102268
Regression Output for
Anderson Company
Regression Analysis
for the Method of Least Squares
30
The regression analysis gives rise to the following
equation for Andersons material handling cost:
Regression Analysis
for the Method of Least Squares
$854.50 + ($12.39 number of moves)
31
Reliability of Cost Formulas
Hypothesis test of parameters
The lower the P-value, the more likely that the
true parameter is significantly different from 0
Traditional benchmarks of significance are
0.10, 0.05 or 0.01
32
Reliability of Cost Formulas
Goodness of fit
R
2
is the coefficient of determination
Measures the percentage of change in the
dependent variable explained by changes in
the independent variable
The closer to 1.0, the better; no benchmark
33
Reliability of Cost Formulas
Confidence intervals
The standard error is used to determine the
range of possible values around the
predicted value:
Standard Confidence
t-statistic
Error Interval
34
X
1
= first explanatory variable
X
2
= second explanatory variable
Multiple Regression
Least-squares method is used to fit an
equation involving two or more
explanatory variables
Y = F + V
1
X
1
+ V
2
X
2
etc.
where
35
Multiple Regression
Spreadsheet Data for
Anderson Company
Month
Materials
Handling
Cost
Number
of Moves
Pounds
Moved
January $2,000 100 6,000
February 3,090 125 15,000
March 2,780 175 7,800
April 1,990 200 600
May 7,500 500 29,000
June 5,300 300 23,000
July 4,300 250 17,000
August 6,300 400 25,000
September 5,600 475 12,000
October 6,240 425 22,400
X
2
X
1
36
Multiple Regression Analysis
for the Method of Least Squares
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.999420
R Square 0.998841
Adjusted R Square 0.998509
Standard Error 75.762721
Observations 10
ANOVA
df SS MS F
Regression 2 34613020.07 17306510.04 3015.076722
Residual 7 40179.92954 5739.989934
Total 9 34653200
Coefficients Standard Error t Stat P-value
Intercept 507.309711 57.322496 8.850098 0.000048
X Variable 1 7.835162 0.234048 33.476720 0.000000
X Variable 2 0.107181 0.003742 28.642864 0.000000
37
Y = $507 + $7.84X
1
+ $0.11X
2
Y = $507 + $7.84(350) + $0.11(17,000)
= $507 + $2,744 + $1,870
= $5,121
Multiple Regression
Based on the multiple regression analysis, the
cost formula is written as:
In November the company expects to make 350
moves with a weight of 17,000 pounds. The
predicted cost of material handling is:
38
1 100 100 100
2 80 (80% 100) 160 60
3 70.21 210.63 50.63
4 64 (80% 80) 256 45.37
5 59.57 297.85 41.85
6 56.17 337.02 39.17
7 53.45 374.15 37.13
8 51.20 (80% 64) 409.60 35.45
16 40.96 655.36 28.06
32 32.77 1,048.64
Cumulative Cumulative Cumulative Individual Units
Number Average Time Total Time: Time for nth
of Units per Unit in Hours Labor Hours Unit-Labor Hours
(1) (2) (3) = (1) (2) (4)
Cumulative Average Time Learning
Curve with 80% Learning Rate
39
Graph of Cumulative Total Hours Required
and the Cumulative Average Time per Unit
40
Managerial Judgment
Managerial judgment is critically important
in determining cost behavior and is by far
the most widely used method in practice
Advantage simplicity
Disadvantage poor judgment leads to errors
COST MANAGEMENT
Guan Hansen Mowen
41
End Chapter 3