An organization's accountant is estimating next period's total overhead costs. She performed two regression analyses, one based on direct labour hours and the other based upon machine hours. The results were:
Total overhead = $150,000 + $4 x direct labour hours
Adjusted R-square = 0.65
Total overhead = $130,000 + $5 x machine hours
Adjusted R-square = 0.77
For the next period, the accountant anticipates using 28,000 direct labour hours and 26,000 machine hours. Based upon this information, what is the best estimate for overhead for the next period?
A) $262,000
B) $260,000
C) $254,000
D) $270,000

Question

Quizplus · Accepted Answer

Using the regression analysis equation based on direct labour hours:
Total overhead = $150,000 + $4 x direct labour hours
Total overhead = $150,000 + $4 x 28,000 = $262,000

Using the regression analysis equation based on machine hours:
Total overhead = $130,000 + $5 x machine hours
Total overhead = $130,000 + $5 x 26,000 = $260,000

Since the second regression analysis equation has a higher adjusted R-square value (0.77 vs 0.65), it can be considered more reliable. Therefore, the best estimate for overhead for the next period is $260,000.

An Organization's Accountant Is Estimating Next Period's Total Overhead Costs