possible misspecijication of overhead LLA Ralph works for a municipality and is studying a proposal that the city subcontract with a small neighboring community to extend its municipal garbage collection serviee to that community. This has some appeal, as Ralph' s municipality has the capacity and flexibility to do this and also has access to aregeneration facility. The overhead cost is the troublesome part of the analysis. The cost structure suggests overhead varies with direct labor hours. Statistical analysis, a regression of overhead on direct labor hours, confirms this and suggests an LLA with a slope of 44.9. The underlying regression is free of specification coneerns.

At this point the mayor's assistant claims the regression is seriously flawed because of "asset record keeping inadequacies." It tums out that no depreciation accounting is done in the municipality and the overhead has been systematically understated by a total of 3,000,000 during the sample period in question. (Capital equipment is recorded, on a cash basis, in a separate fund.)

What will happen to Ralph' s re gression if the 3,000,000 is allocated across time periods, and then into the overhead account each period, using straight line depreciation?

Contrast this with the case of sum-of-the-years' -digits depreciation.

AppendixLO1