Regression Analysis You have recently been hired as a cost accountant at Travenol Laboratories.

Regression Analysis

You have recently been hired as a cost accountant at Travenol Laboratories. The controller is an "old

school" accountant and has heard that you recently graduated with a degree in accounting. One day he

summons you to his office to assign you a task. He says, "I understand that recently educated

accountants are using a variety of statistical tools to determine causality between costs and their

respective drivers. We have been using direct labor hours as our cost driver for our manufacturing

overhead costs for as long as I have been here. In the last few years our production processes have

become more automated and I am not sure whether direct labor hours is the appropriate allocation

basis for our manufacturing overhead costs. I would like you to use some of those statistical tools to

determine whether there is a more appropriate cost driver."

You leave his office recognizing that this is a tremendous career opportunity. If you can convince your

boss that you can use statistical analysis to determine the best cost driver, you will have established

yourself in the department as a knowledgeable professional. It is good fortune that one of your projects

in your cost class dealt specifically with this type of analysis.

Year MOH DLH DL$ MH DM$

2000 959,770 9,395 100,926 11,487 144,851

2001 862,178 6,219 133,284 19,067 115,829

2002 895,696 6,848 142,719 11,061 131,297

2003 848,527 10,932 203,982 15,444 146,817

2004 845,614 5,440 41,604 18,623 147,208

2005 790,814 14,859 222,892 17,390 108,088

2006 903,961 5,512 42,686 11,609 139,831

2007 904,067 10,284 114,264 14,204 144,130

2008 899,261 6,022 90,330 12,788 142,403

2009 964,293 8,701 90,517 15,867 163,767

2010 925,619 13,483 162,242 19,156 146,685

2011 769,965 12,348 145,227 10,964 114,007

2012 971,360 14,985 264,771 15,938 133,955

2013 774,788 6,688 60,325 11,578 140,928

2014 880,557 13,294 239,414 19,108 142,746

2015 983,464 14,067 211,011 13,839 102,336

MOH=Manufacturing Overhead MH=Machine Hours

DLH=Direct Labor Hours DM$=Direct Material Dollars

DL$=Direct Labor Dollars

Required:

1. Perform a regression on DLH, DL$, MH and DM$ and comment on the following for each;

a. The equation

b. Goodness of fit

c. Significance of independent variables

d. Any autocorrelation

2. What would you recommend and why?