Question

a large hotel​ chain, has been using​ activity-based costing to determine the cost of a​ night's stay at their hotels.

One of the​ activities, "Inspection," occurs after a customer has checked out of a hotel room.

Fitzgerald

inspects every

10th

room and has been using​ "number of rooms​ inspected" as the cost driver for inspection costs. A significant component of inspection costs is the cost of the supplies used in each inspection.

Dawn

McAdams​,

the chief​ inspector, is wondering whether inspection​ labor-hours might be a better cost driver for inspection costs.

Dawn

gathers information for weekly inspection​ costs, rooms​ inspected, and inspection​ labor-hours as​ follows:

Week	Rooms Inspected	Inspection Labor-Hours	Inspection Costs
Week 1	260	85	$1,800
Week 2	328	129	2,560
Week 3	341	101	2,310
Week 4	437	142	2,850
Week 5	200	67	1,460
Week 6	245	80	1,750
Week 7	258	127	1,780
Week 8	331	146	2,260

Dawn

runs regressions on each of the possible cost drivers and estimates these cost​ functions:

                                               Inspection

Costs=$246.60

​+

​($6.17

x Number of rooms​ inspected)

                                               Inspection

Costs=$787.71

​+

​($11.94

x Inspection​ labor-hours)

1.	Explain why rooms inspected and inspection​ labor-hours are plausible cost drivers of inspection costs.
2.	Plot the data and regression line for rooms inspected and inspection costs. Plot the data and regression line for inspection​ labor-hours and inspection costs. Which cost driver of inspection costs would you​ choose? Explain.
3.	Dawn expects inspectors to inspect 306 rooms and work for 124 hours next week. Using the cost driver you chose in requirement​ 2, what amount of inspection costs should Dawn ​budget? Explain any implications of Dawn choosing the cost driver you did not choose in requirement 2 to budget inspection costs.

Answer 1

1)

Rooms inspected and inspection​ labor-hours are plausible cost drivers of inspection costs because,

Inspection cost and the inspection cost of the labor is directly related economical because with increase in the inspection labor cost inspection cost also increases.

Inspection cost and the rooms inspection cost directly related economical because with increase in the rooms inspection cost inspection cost also increases.

2)

Regression analysis is relationship between the independent variable and the dependent variable

Relationship between the inspection cost and number of inspection labor hour

Week	Inspection​ labor-hours	Inspection costs	Regression inspection costs    Inspection Costs = $787.71​+​($11.94x Inspection​ labor-hours)
1	85	1800	1802.61
2	129	2560	2327.97
3	101	2310	1993.65
4	142	2850	2483.19
5	67	1460	1587.69
6	80	1750	1742.91
7	127	1780	2304.09
8	146	2260	2530.95

Slope here is not steep which shows its good for weekly cost.

Relationship between the inspection cost and number of rooms inspected

Week	number of rooms inspected	Inspection costs	Regression inspection costs Inspection Costs=$246.60 ​+​($6.17x Number of rooms​inspected)
1	260	1800	1850.8
2	328	2560	2270.36
3	341	2310	2350.57
4	437	2850	2942.89
5	200	1460	1480.6
6	245	1750	1758.25
7	258	1780	1838.46
8	331	2260	2288.87

Here the slope is steeper and hence indicating higher cost.

This is how to analyse using regression Analysis.