Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

Evaluating alternative simple regression models, not for profit

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Evaluating alternative simple regression models, not for profit.
(30–40 min)
1a
Solution Exhibit A plots the relationship between number of academic programmes and overhead costs.
b
Solution Exhibit B plots the relationship between number of enrolled students and overhead costs.
2
Solution Exhibit C compares the two simple regression models estimated by
Raphaël. Both regression models appear to perform well when estimating overhead costs. Cost function 1 using number of academic programmes as the independent variable appears to perform slightly better than cost function 2 which uses number of enrolled students as the independent variable. Cost function 1 has a high r
2

and goodness of fit, a high t-value indicating a significant relationship between the number of academic programmes and overhead costs and meets all the specification assumptions for ordinary least squares regression. Cost function 2 has a lower r
2

than cost function 1 and exhibits positive autocorrelation among the residuals as indicated by a low Durbin–Watson statistic.
3
The analysis indicates that overhead costs are related to the number of academic programmes and the number of enrolled students. If Ecole Supérieure des Mines
(ESM) has pressures to reduce and control overhead costs, it may need to look hard

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 at closing down some of its academic programmes and reducing its intake of students. Reducing enrolled students may cut down on overhead costs, but it also cuts down on revenues (tuition payments, hurts the reputation of the school and reduces its alumni base, which is a future source of funds. For these reasons, ESM may prefer to downsize its academic programmes, particularly those programmes that attract few students. Of course, ESM should continue to reduce costs by improving the efficiency of the delivery of its programmes.

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