Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
Solution Exhibit Cb Comparison of alternative cost functions for overhead costs estimated with simple regression for
Ecole Supérieure des Mines.
Criterion
Cost function 1:
number of
academic programmes as
independent variable
Cost function 2:
number of
enrolled students as
independent variable
1 Economic plausibility A positive relationship between overhead costs and number of academic programmes is economically plausible at Ecole
Supérieure des Mines. A positive relationship between overhead costs and number of enrolled students is economically plausible at
Ecole Supérieure des Mines.
2 Goodness of fit
r2 = 0.72 Excellent goodness of fit.
r2 = 0.55 Good goodness of fit, but not as good as for number of academic programmes.
3 Significance of independent variables)
t-value of 5.08 is significant. t-value of 3.53 is significant.
4 Specification analysis of estimation assumptions Plot of the data indicates that assumptions of linearity, constant variance, independence of residuals and normality of residuals hold, but inferences drawn from only 12 observations are not reliable
Durbin–Watson statistic = 1.81 indicates that independence of residuals holds.
Plot of the data indicates that assumptions of linearity, constant variance and normality of residuals hold, but inferences drawn from only 12 observations are not reliable the Durbin–Watson statistic =
0.77 indicates that independence of residuals does not hold.
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© Pearson Education Limited 2012
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