Question one

A ltd. has three production departments (P, Q and R) and two service departments (X and Y). The total overheads for the departments are given below:

Department

Overheads

P

$35,000

Q

$64,000

R

$19,000

X

$22,000

Y

$38,000

The reallocation percentages of the service departments' costs are given below:

Department

P

Q

R

X

Y

X

20%

25%

25%

10%

Y

25%

30%

30%

15%

Use the simultaneous equation method to allocate the service department overheads to production departments.

Explain two advantages of using simple linear regression method for cost estimation.