Question

The controller of Chittenango Chain Company believes that the identification of the variable and fixed components of the firm’s costs will enable the firm to make better planning and control decisions. Among the costs the controller is concerned about is the behavior of indirect-materials cost. She believes there is a correlation between machine hours and the amount of indirect materials used.

A member of the controller’s staff has suggested that least-squares regression be used to determine the cost behavior of indirect materials. The regression equation shown below was developed from 40 pairs of observations.

S = $170 + $8H

where S = Total monthly cost of indirect materials

          H = Machine hours per month

To determine the validity of the cost estimate computed in requirement (2), what question(s) would you ask the controller about the data used for the regression? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Do the observations contain any outliers, or are they all representative of normal operations? unanswered

Are there any mismatched time periods in the data? Are all of the indirect material cost observations matched properly with the machine hour observations? unanswered

Are there any allocated costs included in the indirect material cost data? unanswered

Are the cost data affected by inflation? unanswered

None of the above. unanswered

Answer 1

You would ask-

Do the observations contain any outliers, or are they all representative of normal operations?

Are there any mismatched time periods in the data? Are all of the indirect material cost observations matched properly with the machine hour observations?

Are there any allocated costs included in the indirect material cost data?

Are the cost data affected by inflation?

Explanation:

You need a graph to plot and see about the outliers , the main purpose of that is that the regression equation caotures all the population , if any point does not lie on thre regression line is a outlier.

also the data needs to be corrected of inflation , to oorrecty indicate current prices

Also the direct materials will needed all the time, it is the indirect materials which need to be clarified and the time period of which should be properly matched with the machine hours used, as when there is no production there should'nt be any indirect material requirement as this is a manufacturing overhead