Cost estimation using the linear regression formula The management accountant at Josephine Ltd is trying to predict the quarterly total maintenance cost for a group of similar machines. She has extracted the following information for the last eight quarters:

The effects of inflation have been eliminated from the above costs.
The management accountant is using linear regression to establish an equation of the form y = a + bx and has produced the following preliminary calculations:
= (total maintenance cost X production units) = £61250 million = (total maintenance cost)? = £809 598 million > (production units) = 4640 million Required:

(a) Using the formulae given in this chapter establish the equation which will allow the management accountant to predict quarterly total maintenance costs for given level of production. Interpret your answer in terms of fixed and variable maintenance costs.
(7 marks)

(b) Using the equation established in (a), predict the total maintenance cost for the next quarter when planned production is 44000 units. Suggest a major reservation, other than the effect of inflation, you would have about this prediction.
(3 marks)
(10 marks)
ACCA - Financial Information for Management

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Quarter number 1 2 3 4 5 6 7 8 Total maintenance cost (2000) 265 302 222 240 362 295 404 400 Production units (000) 20 24 16 18 26 22 32 30