Cost Estimation, Regression, Choosing Cost Drivers

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisors suggest that overhead seems to vary with labor hours, machine hours, or both. the following data were collected from last year's operations:

Month	Labor Hours	Machine Hours	Overhead Costs
1	3,625	6,775	$513,435
2	3575	7,035	518,960
3	3,400	7,600	549,575
4	3,700	7,265	541,400
5	3,900	7,955	581,145
6	3,775	7,895	572,320
7	3,700	6,950	535,110
8	3,625	6,530	510,470
9	3,550	7,270	532,195
10	3,975	7,725	565,335
11	3,375	6,490	503,775
12	3,550	8,020	564,210

1)Plot overhead costs versus machine hours and overhead costs versus labor-hours. Does the number of machine hours appear to be a more plausible cost dirver of overhead costs than labor-hours? Explain.

2)Use regression analysis to examine overhead costs versus number of machine hours and overhead costs versus labor-hours. Does the number of machine hours appear to be a more plausible cost dirver of overhead costs than labor-hours? Which cost driver of overhead costs would you choose? Explain.

3)Sharon expects 7,500 machine hours and 3,600 labor hours next period. Using the cost driver you chose in requirement 2, what amount of overhead costs should managers budget?