Cost Classification &

Cost Behavior
Acctg 141

cost
Monetary measure of resources given
up to attain an objective (e.g.
acquisition of goods and services)
COST OBJECT - anything of interest or useful informational value

COST DRIVER - activities that have direct cause and effect

relationship with cost

General types of Cost

UNEXPIRED cost goes to the
balance sheet in the form of asset
EXPIRED cost goes to the income
statement in the form of expenses
and losses
Expenses vs Losses

Matching principle

Types of Costs

The opportunity cost is the monetary amount

associated with the next best use of the
resource.

differential costs- (benefits) costs or

benefits that change between/among
alternatives
Irrelevant costs -Costs that dont
change are irrelevant to the decision
Choose the alternatives where differential
benefits exceed differential costs

Opportunity costs
Sunk costs
Controllable /avoidable
costs/discretionary costs

Costs
Coststhat
thathave
havealready
alreadybeen
beenincurred
incurredand
andcannot
cannotbe
be
changed
changedno
nomatter
matterwhat
whataction
actionis
istaken
takenin
inthe
thefuture.
future.

Classifications of Costs
Behavior how costs react to changes in
underlying cost driver
Variable or Fixed

Function related to production or sales

Product or Period
Product costs
Direct Material
Direct Labor
Factory Overhead

Traceability

Direct or Indirect Cost

Non-manufacturing Costs
Marketing or
Selling
(Distribution)
Costs

Administrative
Costs

Costs necessary to get

the order and deliver
the product.

All executive,
organizational, and
clerical costs.

Product Costs Versus Period Costs

Product costs
(inventoriable cost)

include direct materials,

direct labor, and
manufacturing overhead.
Inventory

Cost of Good Sold

Period costs include all

marketing or selling
costs and

administrative costs.
Expense

Sale

Balance
Sheet

Income
Statement

Income
Statement

The Conversion Process

Input

Output

Purchase
raw materials
or supplies

Product or
Service

CONVERSION

Degrees of Conversion
Low

Low

High

Moderate
Moderate
Department stores
Gas stations
Jewelry stores
Travel agencies

Moderate
Florists
Meat markets
Oil-change businesses

High

Manufacturing
Construction
Agriculture
Architecture
Auditing
Mining
Printing
Restaurants

Service Company
Input
Purchase
supplies

Use supplies,
labor, overhead
to provide service

Significant amount of labor

Tangible or intangible output

Output
Sell to
customer

Retail Company
Input
Purchase
products
for resale

Purchase finished goods

Resell to customers

Output
Warehouse
and/or display
Sell to
customer

Manufacturer
Significant amount of labor and machinery with
tangible output

Input

Output

Purchase
raw materials
and supplies

Finished
product
Production
Center
add labor and
overhead

Sell to
customer

Stages of Cost production

Product Cost Flows

Product Cost Flows

Prime Costs

Conversion Costs

Product Cost Flows

Product Cost Flows

Product Cost Flows

Work
In Process

+
=

Beginning work in
process inventory
Manufacturing costs
for the period
Total work in process
for the period
Ending work in
process inventory
Cost of goods
manufactured

Finished Goods
Beginning finished
goods inventory
+ Cost of goods
manufactured
= Cost of goods
available for sale
- Ending finished
goods inventory
Cost of goods
sold

Manufacturing Cost Flows

Costs

Balance Sheet
Inventories

Material Purchases

Raw Materials

Direct Labor

Work in
Process

Manufacturing
Overhead

Selling and
Administrative

Finished
Goods

Period Costs

Income
Statement
Expenses

Cost of
Goods
Sold
Selling and
Administrative

Graphical Analysis of Activity Costs and Rate of Output

Total
Dollars

Curvilinear
CurvilinearTotal
Total
Cost
Cost Curve
Curve

Marginal
MarginalCosts
Costsare
arethe
thecosts
coststo
toproduce
produceone
one
more
moreadditional
additionalunit
unitof
ofoutput=slope
output=slope..

Output
Start-up Normal
Range Operations

Exceeding
Capacity

Relevant Range
Relevant
Relevant
Range
Range

Total
Dollars

Start-up
Normal
Range Operations

Total
Cost

Exceeding
Capacity

Output

The
Therelevant
relevantrange
range
isisthe
theportion
portionof
ofthe
the
curvilinear
curvilineartotal
totalcost
cost
curve
curvethat
thatappears
appears
in
inthe
thenormal
normal
operations
operationsarea.
area.

The Linearity Assumption and the

Relevant Range

Total Cost

A
A straight
straight line
line
Economists
closely
closely
Curvilinear Cost approximates
approximates aa
Function
curvilinear
curvilinear

Relevant
Range

variable
variable cost
cost
line
line within
within the
the
relevant
relevant range.
range.

Accountants Straight-Line
Approximation (constant
unit variable cost)
Activity

Cost Classifications for

Predicting Cost Behavior
By
By reaction
reaction to
to changes
changes in
in the
the level
level of
of
activity
activity within
within the
the relevant
relevant range.
range.
Total
Total variable
variable costs
costs change
change when
when activity
activity
changes.
changes.
Total
Total fixed
fixed costs
costs remain
remain unchanged
unchanged when
when
activity
activity changes.
changes.

Cost Classifications for

Predicting Cost Behavior

Extent of Variable Costs

The proportion of variable costs differs across organizations. For
example . . .
A
A public
public utility
utility with
with
large
large investments
investments in
in
equipment
equipment will
will tend
to
to have
have fewer
variable
variable costs.
costs.
A
A service
service company
will
will normally
normally have
have aa high
high
proportion
proportion of
of variable
variable costs.
costs.

A
A manufacturing
manufacturing company
company
will
will often have
have many
many
variable
variable costs.
costs.

A
A merchandising company
usually
usually will
will have
have a high
high
proportion
proportion of variable costs
like
like cost
cost of
of sales.
sales.

Types of Fixed Costs

Committed
Committed

Discretionary
Discretionary

Long-term,
Long-term, cannot
cannot be
be
significantly
significantly reduced
reduced
in
in the
the short
short term.
term.

May
May be
be altered
altered in
in the
the shortshortterm
term by
by current
current managerial
managerial
decisions
decisions

Examples

Examples
Examples

Depreciation on
Equipment and
Real Estate Taxes

Advertising
Advertising and
and
Research
Research and
and
Development
Development

Mixed Costs

Total Mobile Phone Cost

ta
o
T

xe
i
lm

os
c
d

t
Fixed Monthly
Phone Charge

X
Activity (minutes)

Fixed Monthly
Phone Charge

Mixed Costs
The total mixed cost line can be expressed
as an equation: Y = a + bX
Where:

Y
Total Mobile Phone Cost

Y
a

ta
o
T

xe
i
lm

os
c
d

Activity (minutes)

= the total mixed cost

= the total fixed cost (the
vertical intercept of the line)
= the variable cost per unit of
activity (the slope of the line)
= the level of activity

t
Variable
Cost per minute

Fixed Monthly
Phone Charge

The Scattergraph Method

Plot
Plot the
the data
data points
points on
on aa graph
graph
(total
(total cost
cost vs.
vs. activity).
activity).

Cost

20

* *
* *

10

* ** *
**

Activity - output

The Scattergraph Method

Y

Draw
Draw aa line
line through
through the
the data
data points
points with
with about
about an
an
equal
equal numbers
numbers of
of points
points above
above and
and below
below the
the line.
line.

Cost

20

* *
* *

10

* ** *
**

Activity - output

The Scattergraph Method

Use
Useone
onedata
datapoint
pointto
toestimate
estimatethe
the total
total level
level of
ofactivity
activityand
andthe
the total
total
cost.
cost.

Cost

Y Total cost = TL11

20

* *
* *

10

* ** *
**

Intercept = Fixed cost: TL 10

Activity - output

Activity 0.8 units

The Scattergraph Method

Make
Make aa quick
quick estimate
estimate of
of variable
variable cost
cost per
per unit
unit and
and determine
determine the
the cost
cost
equation.
equation.

Variable cost per unit =

TL1
0.8

= TL1.25/ unit of output

Y = TL10 + TL1.25X
Total
Total cost
cost

Number
Number of units

The High-Low Method

Assume the following hours of maintenance work and the total maintenance
costs for six months.

High
level of
activity

Low
level of
activity

The High-Low Method

Assume the following hours of maintenance work and the total maintenance
costs for six months.

Step 1: Subtract Low level of

activity from high level of activity
(800 500 = 300)
Step 2: Subtract Low level of
activity cost from high level of
activity cost
(9, 800 7, 400 = 2, 400)
Step 3: Determine VC/u by
dividing change in total cost by
change in activity
(2, 400/300 = 8/hr)

Y = a + bX

The High-Low Method

Assume the following hours of maintenance work and the total maintenance
costs for six months.

If b = 8/hr, then

Y = a + 8X

At 500 hours:
7, 400 = a + 8(500)
7, 400 = a + 4, 000
a = 3, 400

Y = 3, 400 + 8X

(checking) At 800 hours:

9, 800= a + 8(800)
9, 800 = a + 6, 400
a = 3, 400

Assigning Costs to Cost Objects

Direct costs

Indirect costs

Costs that can be

easily and
conveniently traced
to a unit of product
or other cost object.

Costs that cannot be

easily and
conveniently traced
to a unit of product
or other cost object.

Examples: direct
material and direct
labor

Example:
manufacturing
overhead

Cost Classifications for Decision

Making
Every decision involves a choice
between at least two alternatives.
Only those costs and benefits that
differ between alternatives are
relevant in a decision. All other costs
and benefits can and should be
ignored.

Differential Costs and Revenues

Costs and revenues that differ
among alternatives.
Example: You have a job paying TL 1,500 per month in
your hometown. You have a job offer in a neighboring
city that pays TL 2,000 per month. The commuting
cost to the city is TL 300 per month.

Differential revenue is:

TL2,000 TL1,500 = TL500
Differential cost is:
TL 300

Opportunity Costs
The potential benefit that is given up when
one alternative is selected over another.

Example: If you were not attending this

program, you could save TL 10,000 per year.
Your opportunity cost?

Sunk Costs
Sunk costs have already been incurred and cannot
be changed now or in the future. They should be
ignored when making decisions.

Example: You bought an automobile that

cost TL10,000 two years ago. The TL10,000
cost is sunk because whether you drive it,
park it, trade it, or sell it, you cannot change
the TL10,000 cost.

Step Cost
Cost that SHIFTS upward or downward
when activity changes by a certain
interval or step
Can be variable or fixed
Step variable cost has small step (shift)
Step fixed cost has large step (shift)
Example: An airline ticket agent who can serve 3, 500 customers a month will get a
salary of P50, 000 monthly; hence, the airline just need 3 ticketing agents to serve
10,000 customers. But when sales volume increases from 10, 000 customers to 12, 800
customers, the airline will need 4 ticketing agents. Therefore, for every 3, 500 increase in
customers, the airline needs to pay P50, 000 for additional ticket agent.

REVIEW QUESTIONS

1.
The accounting records of Tacoma
Company revealed the following costs:
direct materials used, $170,000; direct
labor, $350,000; manufacturing
overhead, $400,000; and selling and
administrative expenses, $220,000.
Tacoma's product costs total

$920, 000

2.
The accounting records of Hill
Corporation revealed the following
selected costs: Sales commissions,
$40,000; plant supervision, $94,000;
and administrative expenses, $185,000.
Hill's period costs total

$225,000

3.
Norwood Appliance produces washers
and dryers in an assembly-line process.
Labor costs incurred during a recent
period were: corporate executives,
$100,000; assembly-line workers,
$80,000; security guards, $18,000; and
plant supervisor, $30,000. The total of
Norwood's direct labor cost was:

$80,000

4.
The accounting records of Westcott Company revealed the
following costs:
Factory utilities
$ 35,000
Wages of assembly-line personnel 170,000
Customer entertainment
45,000
Indirect materials used
19,000
Depreciation on salespersons' cars 51,000
Production equipment rental costs 110,000
Costs that would be considered in the calculation of
manufacturing overhead total:

$164,000

5.
Fort Walton Industries began July with a
finished-goods inventory of $48,000.
The finished-goods inventory at the end
of July was $41,000 and the cost of
goods sold during the month was
$125,000. The cost of goods
manufactured during July was

$118,000

6.
Kansas Plating Company reported a cost of goods
manufactured of $260,000, with the firm's yearend balance sheet revealing work in process and
finished goods of $35,000 and $67,000,
respectively. If supplemental information
disclosed raw materials used in production of
$40,000, direct labor of $70,000, and
manufacturing overhead of $120,000, the
company's beginning work in process must have
been:

$65,000

7.
The accounting records of Bronco Company
revealed the following information:
Raw materials used
$ 60,000
Direct labor
125,000
Manufacturing overhead 360,000
WIP inventory, 1/1
50,000
FG inventory, 1/1
189,000
WIP inventory, 12/31
76,000
FG inventory, 12/31
140,000
Bronco's cost of goods manufactured is

$519,000

8.
The accounting records of Dolphin Company
revealed the following information:
Total manufacturing costs $530,000
Work-in-process inventory, Jan. 1 56,000
Work-in-process inventory, Dec. 31 78,000
Finished-goods inventory, Jan. 1 146,000
Finished-goods inventory, Dec. 31 123,000
Dolphin's cost of goods sold is

$531,000

9.
The variable costs per unit are $4 when
a company produces 10,000 units of
product. What are the variable costs
per unit when 8,000 units are
produced?

$4

10.
The fixed costs per unit are $10 when a
company produces 10,000 units of
product. What are the fixed costs per
unit when 12,500 units are produced?

$8

11.
Total costs are $120,000 when 10,000
units are produced; of this amount,
variable costs are $48,000. What are
the total costs when 12,000 units are
produced?

$129,600

12.
Baxter Company, which pays a 10%
commission to its salespeople, reported
sales revenues of $210,000 for the
period just ended. If fixed and variable
sales expenses totaled $56,000, what
would these expenses total at sales of
$168,000?

$51,800

Summary of the Types of Cost

Classifications
Financial reporting (expired & unexpired)
Predicting cost behavior (variable &
fixed)
Assigning costs to cost objects- productsdetermining unit costs (product & period)
Decision making (relevant & irrelevant)

REVIEW QUESTIONS

13.
Furman Tailors has gathered information on utility costs for
the past year. The controller has decided that utilities are a
function of the hours worked during the month. The following
information is available and representative of the companys
utility costs:
Hours worked
Utility cost incurred
Low point 1,300
$ 903
High point
1,680
1,074
If 1,425 hours are worked in a month, total utility cost
(rounded to the nearest dollar) using the high-low method
should be

$959

14.
Leon Corporation has the following data relating to its power
usage for the first six months of the current year.
Month Usage (Kw)Cost
Jan.
500
$450
Feb. 550
455
Mar. 475
395
Apr.
425
310
May
450
380
June 725
484
Assume usage is within the relevant range of activity. Using
high low method, compute for variable cost per unit

$0.58

15.
Leon Corporation has the following data relating to its power
usage for the first six months of the current year.
Month Usage (Kw)Cost
Jan.
500
$450
Feb. 550
455
Mar. 475
395
Apr.
425
310
May
450
380
June 725
484
Assume usage is within the relevant range of activity. Using
high low method, compute for fixed cost.

$63.50

16.
Leon Corporation has the following data relating to its power
usage for the first six months of the current year.
Month Usage (Kw)Cost
Jan.
500
$450
Feb. 550
455
Mar. 475
395
Apr.
425
310
May
450
380
June 725
484
Assume usage is within the relevant range of activity. Using
high low method, Leon Corporation estimates its power
usage for July at 660 watts. Compute the total power cost
for July.

$446.30

Method of Least Squares

Month

Maintenance Hours
Cost (y)
(x)

Called regression analysis

January
950of
Determine mathematically
a $7,
line
February
7, 400
best fit, or linear regression
line,
March
8, 275
through a set of pointsApril
7, 625

625
500
700
550

May

9, 100

775

June

9, 800

800

Assume the following hours of maintenance work and the total maintenance
costs for six months.

Month

Maintenance Hours
Cost (y)
(x)

January

$7, 950

625

February

7, 400

500

March

8, 275

700

April

7, 625

550

May

9, 100

775

June

9, 800

800

Step 1: Determine summation of

y (cost)
Step 2: Compute for the average
cost y. (total y divided by # of
observations)
Step 3: Deduct actual amount
with the average for each month.
Step 4: Square the amount
obtained in step 3.
Step 5: Determine summation of
x (activity level)

Assume the following hours of maintenance work and the total maintenance
costs for six months.

Month

Maintenance Hours
Cost (y)
(x)

January

$7, 950

625

February

7, 400

500

March

8, 275

700

April

7, 625

550

May

9, 100

775

June

9, 800

800

Step 6: Compute for the average

activity level (total x divided by #
of observations)
Step 7: Compute the difference
of the actual activity level with
the average activity level.
Step 8: Square each amount
computed in step 3 and step 6.

Income Statement Presentation

Used primarily for

external reporting.

Used primarily by
management.

Idle Time
Machine
Breakdowns

Material
Shortages
Power
Failures

The labor costs incurred

during idle time are ordinarily
treated as manufacturing
overhead.

Overtime
The overtime premiums for all factory
workers are usually considered to be part
of manufacturing overhead.

Unit Costs
Direct Material- determined as actual usage
of materials or by engineering estimates
(standard costs)
Direct Labor- determined as actual usage of
materials or by engineering estimates
(standard costs)
MOVH common production costs assigned
to each unit
Traditional
ABC

Unit cost = DM + DL + MOVH per unit

Labor Fringe Benefits

Fringe benefits include employer paid costs for
insurance programs, retirement plans,
supplemental unemployment programs, Social
Security, Medicare, workers compensation and
unemployment taxes.
Some companies
include all of these
costs in
manufacturing
overhead.

Other companies treat

fringe benefit
expenses of direct
laborers as additional
direct labor costs.

How to allocate indirect costs to

products MOVH
Depends on the nature of products and
production system
Traditional- direct labor hours (DLH);
number of units produced;
Automation and computer technology have
increased the indirect costs in many
organizations
Activity-Based Costing (ABC)- a procedure
that attempts to provide a more precise
indirect cost allocation

Numerical Example- Unit Cost

THD Company produces 4,000 units of Product A
and 20,000 units of Product B each year.
Direct Material for Product A is TL 10; Product B 15
Total indirect product costs are TL 900,000, and
total direct labor hours(DLH) are 50,000.
Product A requires 2.5 DLH and Product B requires
2.0 DLH to produce.
Direct labor cost per hour TL 30

Continue

Numerical Example
Management at THD believes that indirect costs
are actually caused by the following five activities:

Unit Cost - Traditional

THD uses DLH as the basis
1.determine the allocation of MOVH per
unit = predetermined overhead
rate(PDOR) PDOR= Total Overhead/
Total DLH
2. determine MOVH per unit = PDOR x
DL Cost per hour
3. add DM,DL and MOVH per unit

PDOR and MOVH

Unit Costs Traditional

Numerical Example-MOVH by ABC

The following activity data was supplied by
the management of THD
Activity
Machine setups
Quality inspections
Production orders
Machine-hours worked
Material receipts

Total
5,000
8,000
600
40,000
750

Product A
3,000
5,000
200
12,000
150

Product B
2,000
3,000
400
28,000
600

Numerical Example-MOVH by
ABC
This activity data can be used to develop application
rates for each of the five activities.

Numerical Example-MOVH by
ABC

Numerical Example-MOVH by
ABC
Now that we have calculated the application rates, we
use the rates to assign indirect costs to Product A.

Numerical Example-MOVH by
ABC
Now that we have calculated the application rates, we
use the rates to assign indirect costs to Product A.

Numerical Example-MOVH by
ABC
MOVH costs for a unit of Product B

Reconciliation check

Reconciliation
Indirect costs assigned to Product A
Indirect costs assigned to Product B
Total indirect costs assigned

Amount
$ 392,200
507,800
$ 900,000

Unit Costs Using ABC

Comparison of Unit Costs

Advantages of ABC
Activity-based costing is very useful in firms . . .
With multiple
products and
services.

That have products

and services that use
indirect activities
in different ways.

That have a high

percentage of indirect
product costs.

Problems With ABC

ABC ignores the

difference between
the fixed and variable
costs of an activity.

Proper identification
of cost drivers is
difficult.

ABC is more costly

because additional
measurements and
observations must
be made.

Quality of Conformance
When the overwhelming majority of
products produced conform to
design specifications and are free
from defects.

Prevention and Appraisal Costs

Prevention
Costs

Support activities
whose purpose is to
reduce the number of
defects

Appraisal Costs

Incurred to identify
defective products
before the products are
shipped

Internal and External Failure

Costs
Internal Failure
Costs

External Failure
Costs

Incurred as a result of
identifying defects
before they are shipped

Incurred as a result of
defective products
being delivered to
customers

Examples of Quality Costs

Prevention Costs
Quality training
Quality circles
Statistical process
control activities

Internal Failure Costs

Scrap
Spoilage
Rework

Appraisal Costs
Testing & inspecting
incoming materials
Final product testing
Depreciation of testing
equipment

External Failure Costs

Cost of field servicing &
handling complaints
Warranty repairs
Lost sales

Distribution of Quality Costs

When quality of conformance is low,
total quality cost is high and consists
mostly of internal and external failure.
Companies can reduce their total
quality cost by focusing on
prevention and appraisal. The cost
savings from reduced defects usually
swamps the costs of the additional
prevention and appraisal efforts.

Ventura Company
Quality Cost Report
For Years 1 and 2
Year 2
Amount
Percent*
Prevention costs:
Systems development
Quality training
Supervision of prevention activities
Quality improvement
Total prevention cost

400,000
210,000
70,000
320,000
1,000,000

Year 1
Amount
Percent*

0.80% $ 270,000
0.42%
130,000
0.14%
40,000
0.64%
210,000
2.00%
650,000

0.54%
0.26%
0.08%
0.42%
1.30%

Appraisal costs:
Inspection
Reliability testing
Supervision of testing and inspection
Depreciation of test equipment
Total appraisal cost

600,000
580,000
120,000
200,000
1,500,000

1.20%
1.16%
0.24%
0.40%
3.00%

560,000
420,000
80,000
140,000
1,200,000

1.12%
0.84%
0.16%
0.28%
2.40%

Internal failure costs:

Net cost of scrap
Rework labor and overhead
Downtime due to defects in quality
Disposal of defective products
Total internal failure cost

900,000
1,430,000
170,000
500,000
3,000,000

1.80%
2.86%
0.34%
1.00%
6.00%

750,000
810,000
100,000
340,000
2,000,000

1.50%
1.62%
0.20%
0.68%
4.00%

External failure costs:

Warranty repairs
Warranty replacements
Allowances
Cost of field servicing
Total external failure cost
Total quality cost

400,000
870,000
130,000
600,000
2,000,000
7,500,000

0.80%
900,000
1.74% 2,300,000
0.26%
630,000
1.20% 1,320,000
4.00% 5,150,000
15.00% $ 9,000,000

1.80%
4.60%
1.26%
2.64%
10.30%
18.00%

* As a percentage of total sales. In each year sales totaled $50,000,000.

Quality cost
reports provide
an estimate of
the financial
consequences
of the
companys
current defect
rate.

Quality Cost Reports: Graphic

Form
9

Quality Cost (in millions)

8
7
6

External
Failure

External
Failure

5
Internal
Failure

4
3

Internal
Failure

2
1
0

Appraisal
Appraisal

Quality
reports
can also
be
prepared
in
graphic
form.

20
18
Quality Cost as a Percentage of Sales

$10

16
14
12

Prevention

2
Year

External
Failure

10
Internal
Failure

8
6

Internal
Failure

4
2

Prevention

External
Failure

Appraisal
Appraisal
Prevention

Prevention

2
Year

Uses of Quality Cost

Information
Help managers see the
financial significance of
defects.
Help managers identify the
relative importance of the
quality problems.
Help managers see
whether their quality costs
are poorly distributed.

ISO 9000 Standards

ISO 9000 standards have become an international
measure of quality. To become ISO 9000 certified, a
company must demonstrate:
1. A quality control system is in use, and the
system clearly defines an expected level of
quality.
2. The system is fully operational and is
backed up with detailed documentation of
quality control procedures.
3. The intended level of quality is being
achieved on a sustained basis.

Least-Squares
Regression Using
Microsoft Excel.

Simple Regression Analysis

Example
Matrix, Inc. wants to
know its average
fixed cost and
variable cost per unit.
Using the data to the
right, lets see how to
do a regression using
Microsoft Excel.

Simple Regression Using Excel

You
You will
will need
need three
three pieces
pieces of
of
information
information from
from your
your
regression
regression analysis:
analysis:
1.
1. Estimated
Estimated Variable
Variable Cost
Cost per
per
Unit
Unit (line
(line slope)
slope)
2.
2. Estimated
Estimated Fixed
Fixed Costs
Costs (line
(line
intercept)
intercept)
3.
3. Goodness
Goodness of
of fit,
fit, or
or R
R22
To
Toget
get these
these three
three pieces
pieces
information
information we
we will
will need
need to
to
use
use three
three different
different Excel
Excel
functions.
functions.
LINEST,
LINEST,INTERCEPT,
INTERCEPT,&& RSQ
RSQ

Simple Regression Using Excel

Place
Place your
your cursor
cursor in
in
cell
cell F4
F4 and
and press
press the
the
== key.
key. Click
Click on
on the
the
pull
pull down
down menu
menu and
and
scroll
scroll down
down to
to More
More
Functions
Functions .. .. ..

Simple Regression Using Excel

Scroll
Scroll down
down to
to the
the
Statistical,
Statistical,
functions.
functions. Now
Now
scroll
scroll down
down the
the
statistical
statistical
functions
functions until
until you
you
highlight
highlight
LINEST
LINEST

Simple Regression Using Excel

1.
1. In
In the
the Known_ys
Known_ys box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_xs
Known_xs box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.

Simple Regression Using Excel

Here is the
estimate of the
slope of the line.

1.
1. In
In the
the Known_ys
Known_ys box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_xs
Known_xs box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.

Simple Regression Using Excel

With
With you
you cursor
cursor in
in cell
cell
F5,
F5, press
press the
the == key
key
and
and go
go to
to the
the pull
pull
down
down menu
menu for
for
special
special functions.
functions.
Select
Select Statistical
Statistical and
and
scroll
scroll down
down to
to
highlight
highlight the
the
INTERCEPT
INTERCEPT function.
function.

Simple Regression Using Excel

Here is the
estimate of the
fixed costs.

1.
1. In
In the
the Known_ys
Known_ys box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_xs
Known_xs box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.

Simple Regression Using Excel

Finally,
Finally, we
we will
will
determine
determine the
the
goodness
goodness of
of
22
fit,
or
R
fit, or R ,, by
by
using
using the
the RSQ
RSQ
function.
function.

Simple Regression Using Excel

Here is the
estimate of R2.

1.
1. In
In the
the Known_ys
Known_ys box
box enter
enter C4:C19
C4:C19 for
for the
the range.
range.
2.
2. In
In the
the Known_xs
Known_xs box
box enter
enter D4:D19
D4:D19 for
for the
the range.
range.

17.
Action Trainers provides a personalized training program
that is popular with many companies. The number of
programs offered over the last five months, and the costs of
offering these programs are as follows:
Programs Offered Costs Incurred
Jan
55
$15,400
Feb
45
14,050
Mar
60
18,000
April
50
14,700
May
75
19, 000
Using the least squares regression method, compute the
variable cost per program

$165 per program

18.
Action Trainers provides a personalized training program
that is popular with many companies. The number of
programs offered over the last five months, and the costs of
offering these programs are as follows:
Programs Offered Costs Incurred
Jan
55
$15,400
Feb
45
14,050
Mar
60
18,000
April
50
14,700
May
75
19, 000
Using the least squares regression method, compute the
total fixed cost per month

$6,152.97

19.
Browning Company owns two luxury automobiles that are
used by employees on company business. Mileage and
expenses, excluding depreciation, by quarters for the most
recent year are presented below:
Quarter
Mileage
Expenses
First
3,000
$ 550
Second
3,500
560
Third
2,000
450
Fourth
3,500
600
12,000
$2,160
Determine the variable cost per mile (nearest tenth of a
cent)

$.087/mile

19.
Browning Company owns two luxury automobiles that are
used by employees on company business. Mileage and
expenses, excluding depreciation, by quarters for the most
recent year are presented below:
Quarter
Mileage
Expenses
First
3,000
$ 550
Second
3,500
560
Third
2,000
450
Fourth
3,500
600
12,000
$2,160
Determine the the fixed costs per quarter, using the method
of least squares.

$279