Cost Behavior Analysis; Correlation Analysis; Standard Error of the Estimate. A company’s Cost Department has compiled weekly records of production volume (in units), electric power used, and direct labor hours employed. The range of output for which the fol¬ lowing statistics were computed is from 500 to 2,000 units per week:

Electric power:

y = 1,000 + ,4x, where y is electric power and x is units of production Standard error of the estimate: 100 Coefficient of correlation: .45 Direct labor:

y = 100 + 1,2x, where y is direct labor hours and x is units of production Standard error of the estimate: 300 Coefficient of correlation: .70 Required:

(1) Compute the best estimate of the additional num¬ ber of required direct labor hours, if production for the next period is 500 units greater than production in this period.

(2) Comment on the reliability of the above equations for estimating electric power and direct labor requirements, together with the necessary assump¬ tions if the estimating equations are to be used to predict future requirements. An interpretation of the coefficient of correlation and the standard error of the estimate should be included.

CGA-Canada (adapted). Reprint with permission.