Evaluation of the regression model, Managerial Accounting

Assignment Help:

EVALUATION OF THE REGRESSION MODEL

The regression equation calculated above was based on the assumption that cost varied with the units produced. However, a number of different activity measures exist such as direct labor hours, direct labor cost, number of production runs, and so forth.

It is important therefore to determine the reliability of the estimated cost function. Different tests of reliability can be applied. Such tests can be grouped into three:

Logical relationship tests:

These tests, also referred to as economic plausibility test, are used to determine whether there is an expected logical relationship between the independent and the dependent variable.

To take out this test, it is significant to understand the input-output relationship in the company.

For the illustration there is an expected logical relationship between the number of units and the labor cost mainly because the higher the number of units, the higher the number of labour hours and therefore the higher the labour cost.

Goodness of fit tests:

These tests can be divided into two:

  • Testing the whole model
  • Testing the slope

 

Testing the whole model:

Tests of the entire model are used to establish the consistency of all the independent variables taken altogether. The measures used are:

  • Coefficient of determination (r2)
  • Std error of the estimate
  • F-test

Related Discussions:- Evaluation of the regression model

Job order costing, Morrow Company applies overhead based on direct labor ho...

Morrow Company applies overhead based on direct labor hours. At the beginning of the year, Morrow estimates overhead to be $620,000, machine hours to be 180,000, and direct labor h

Economies or diseconomies of scale , Economies or Diseconomies of Scale ...

Economies or Diseconomies of Scale The costs of a value activity are often subject to economies or diseconomies of scale. Economies of scale occur from the capability to perfo

Types of games, Types of games Four basic ways in which competitive sit...

Types of games Four basic ways in which competitive situations (or games) can be classified are: (a) Number of Competitors: In game theory a competitor is characteriz

Line of credit, It is a commitment by a bank to lend a specific amount of f...

It is a commitment by a bank to lend a specific amount of funds on demand identifies the maximum amount of unsecured credit the bank will allow the customer to borrow at any time.

Study guide , The following information pertains to Fairways Driving Range,...

The following information pertains to Fairways Driving Range, Inc.: The company is considering operating a new driving range facility in Sanford, FL. In order to do so, they will

Classification of ratio according to significance, Classification of ratio ...

Classification of ratio according to significance   The ratios have also been classified according to their significance. Some ratios are more important than other and the fir

Standard costing .., the applicability of standard costing in modern manufa...

the applicability of standard costing in modern manufacturing environments in volatile environments

Evaluate a proposed investment, Q. Evaluate a proposed investment? BMP ...

Q. Evaluate a proposed investment? BMP Consulting (BMPC) conducted an analysis of Delta Corp. and found that the firm consists of two different divisions: Pet Lovers, a pet sup

Marginal costing technique, how company apply marginal costing techniques s...

how company apply marginal costing techniques show with an example

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd