Advanced: Cost estimation using linear regression.

Albatross Plc, the Australian subsidiary of a British packaging company, is preparing its budget for the year to 30 June 2016.

In respect of fuel oil consumption, it is desired to estimate an equation of the form y = a + bx, where y is the total expense at an activity level x, a is the fixed expense and 5 is the rate of variable cost.

The following data relates to the year ending 30 June 2015:

The annual total and monthly average figures for the year ending 30 June 2015 were as follows:

You are required to:

(a) estimate fixed and variable elements of fuel oil expense from the above data by both the following methods:

(b) compare briefly the methods used in

(a) above in relation to the task of estimating fixed and variable elements of a semi-variable cost; (7 marks)

(c) accepting that the coefficient of determination arising from the data given in the question is approximately 0.25, interpret the significance of this fact. (6 marks)
ICAEW Management Accounting (i) high and low points (ji) least'squares regression analysis;

Transcribed Image Text:

Machine Fuel oil Machine Fuel oil hours expense hours expense Month (000) (000) Month (000) (000) July 34 640 January 26 500 August 30 620 February 26 500 September 34 620 March 31 530 October 39 590 April 35 550 November 42 500 May 43 580 December 32 530 June 48 680