A budget is an expression of management's expectations and goals concerning future revenues and costs. To increase their effectiveness, many budgets are flexible, including allowances for the effect of variations in uncontrolled variables. For example. the cost and revenues of many production plans are greatly affected by the number of units produced by the plant during the budget period and this may be beyond the plant manager's control. Standard cost accounting procedures can be used to adjust the direct-cost parts of the budget for the level of production, but it is often more difficult to handle overhead. In many cases, statistical methods are used to estimate the relationship between over-head (y) and the level of production (x) using historical data.

Production (in 10,000): 5, 6, 7, 8, 9, 10, 11

Overhead costs (in $10,000): 12, 11.5, 14, 15, 15.4, 15.3, 17.5

A. Compute the coefficient of determination (R^2) for the regression of overhead costs on production.

B. What percentage of the variation in overhead costs has been explained by the regression?

C. Use F test to test the hypothesis H0: B1 = 0 versus Ha=B1 not equal to 0

D. From the result in C, are production and overhead costs linearly related?