Question
Meyer Grove Company has large overhead costs relative to its direct material and direct labor costs. Because of the significance of these overhead costs, management
Meyer Grove Company has large overhead costs relative to its direct material and direct labor costs. Because of the significance of these overhead costs, management is trying to better understand what is driving them. The management team has asked the accountant to gather select information for some of the activities and product costs that they believe might be driving the overhead costs. The possible cost drivers that the team is looking at include direct labor hours, machine hours, direct material costs, and number of material moves. Data pertaining to the past 24 months for overhead costs as well as usage information for the possible cost drivers is presented below: # of material DL hours Machine hours DM costs moves Overhead costs Jul-09 3,200 2,000 15,000 11 195,000 Aug-09 3,950 2,250 21,500 16 215,000 Sep-09 3,500 2,400 14,700 12 175,000 Oct-09 4,200 1,950 20,000 18 260,000 Nov-09 4,500 2,500 24,500 20 300,000 Dec-09 4,100 2,600 20,500 22 275,000 Jan-10 3,500 3,000 26,000 12 230,000 Feb-10 3,900 2,750 32,500 10 305,000 Mar-10 4,300 2,000 31,500 9 320,000 Apr-10 4,150 1,850 34,000 15 315,000 May-10 4,450 2,150 33,000 11 340,000 Jun-10 3,850 2,300 32,000 20 280,000 Jul-10 3,900 1,800 34,000 22 270,000 Aug-10 4,050 2,250 32,000 16 318,000 Sep-10 4,300 2,200 27,500 13 315,000 Oct-10 4,350 2,500 28,000 21 310,000 Nov-10 4,100 2,100 31,500 15 355,000 Dec-10 4,400 2,250 22,500 19 325,000 Jan-11 4,250 2,500 25,500 16 315,000 Feb-11 4,300 2,400 32,000 20 345,000 Mar-11 4,150 2,450 26,000 18 350,000 Apr-11 4,500 2,550 24,500 22 360,000 May-11 4,650 2,300 30,000 18 330,000 Jun-11 4,250 2,250 33,500 21 365,000 Required: (15 points) I do not want you to copy and paste any of the regression output; I just want you to explain why you chose one particular cost formula over the other possible formulas, and in the process you should cite relevant statistics, plot characteristics, etc., to back up your decision. 1. Using regression, determine the best cost formula to explain this company's monthly overhead costs. Explain how and why you reached this conclusion. Clearly write out the complete cost formula (round all amounts/rates to the nearest cent). A complete answer will thoroughly explain not only why this cost formula is valid, but also why this model's cost driver (or multiple cost drivers) is/are better than any other combination of cost drivers available to predict monthly overhead costs. (For purposes of checking validity, all relevant regression assumptions should be named and adequately evaluated. Be sure to explain how you evaluated these assumptions.) 2. Using the regression model that you specified in part 1, predict this company's overhead costs for next month if the following cost driver levels are expected: direct labor hours 4000 machine hours 2400 direct material costs 25,000 number of material moves 17
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