Farnsworth Company has gathered data on its overhead activities and associated costs for the past ten months. Tracy Heppler, a member of the controller’s department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known.

Tracy has identified 150 different activities and has grouped them into sets based on her belief that they share a common driver. (This classification process has reduced the number of cost formulas needed from 150 to 25.) For example, she has decided that unloading incoming goods, counting goods, and inspecting goods can be grouped together as a more general receiving activity based on her belief that the costs of the three related activities are all driven by the same driver, number of receiving orders. To confirm her activity classification and driver assignment, she has gathered ten months of data on the cost of receiving and on the number of receiving orders. Just in case the number of receiving orders is not a good driver, she also collected data on the pounds of material delivered.

Required:
1. Using the high-low method, prepare a cost formula for the receiving activity using number of receiving orders as the driver.
2. Using the method of least squares, prepare a cost formula for the receiving activity using number of receiving orders as the driver. What does the coefficient of determination tell us about the use of receiving orders as the independent variable?

3. Using the method of least squares, prepare a cost formula for the receiving activity using number of pounds of material delivered as the driver. What does the coefficient of determination tell us about the use of pounds of material as the independent variable?
4. Runa multiple regression using both the number of receiving orders and the pounds of material delivered as the independent variables. Which of the three regression equations do you think is best? Why?lop5

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Month Number of Receiving Orders Pounds of Material Delivered Receiving Cost 1234567890 1,000 300,000 $18,000 700 250,000 15,000 1,500 450,000 28,000 1,200 320,000 17,000 1,300 440,000 25,000 1,100 280,000 18,000 1,600 550,000 30,000 1,400 390,000 24,000 1,700 230,000 21,000 900 230,000 15,000