Aboume Ltd manufactures a microcomputer for the home use market. The management accountant is considering using regression
Question:
Aboume Ltd manufactures a microcomputer for the home use market. The management accountant is considering using regression analysis in the annual estimate of total costs. The following information has been produced for the twelve months ended 31 December 1983:
The management accountant wants to select the best independent variable (X, X2 or X3) to help in future forecasts of total production costs using an ordinary least-squares regression equation. He is also considering the alternatives of using the Hi-Lo and multiple regression equations as the basis for future forecasts.
You are required to:
(a) Identify which one of the three independent variables (X,, X2, X3) given above is likely to be the least good estimator of total costs ( Y). Give your reasons, but do not submit any calculations. (3 marks)
(b) Compute separately, for the remaining two independent variables, the values of the two parameters u and p for each regression line. Calculate the coefficient of determination (~ for each relationship. (6 marks)
(c) State, with reasons, which one of these independent variables should be used to estimate total costs in the future given the results of
(b) above. (3 marks)
(d) Devise the two equations which could be used, using the Hi-Lo technique, instead of the two regression lines computed in
(b) above and comment on the differences found between the two sets of equations. (5 marks)
(e) Comment critically on the use of Hi-Lo and ordinary leastsquares regression as forecasting and estimating aids using the above results as a basis for discussion. In addition, comment on the advantages and problems of usmg multiple regression for forecasting and estimating; and state whether, in your opinion, the management accountant should consider using it in the present circumstances.
(8 marks)
Note: The following formulae can be used to answer the above question.
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