7.4. Regression Analysis
One popular method for estimating the cost function is regression analysis. Unlike the high-low method, in an effort to estimate the variable rate and the fixed cost portion, the regression method includes all the observed data and attempts to find a line of best fit (refer to Chapter 16 for detailed treatment).
From the regression output of Excel (see Exhibit 7.3), the flexible budget formula is
NOTE
R2 tells us how good the estimated regression equation is. In other words, it is a measure of "goodness of fit" in the regression. Therefore, the higher the R2, the more confidence we have in our flexible budget formula.
Example 2
Assume 95 direct labor hours are to be expended next year. The projected factory overhead for next year would be computed as:
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