Evaluation of the regression model, Managerial Accounting

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
Posted Date: 12/4/2012 7:54:41 AM | Location : United States







Related Discussions:- Evaluation of the regression model, Assignment Help, Ask Question on Evaluation of the regression model, Get Answer, Expert's Help, Evaluation of the regression model Discussions

Write discussion on Evaluation of the regression model
Your posts are moderated
Related Questions
Let a quarry's cost function of producing Q tons of stone per hour be given by TC = Q 3 - 10Q 2 + 40Q + 25, so that marginal cost function is MC= 3Q 2 - 20Q + 40. (i) Find th

Learning and Spillovers The cost of a value activity can decline over time due to learning that increases its efficiency. The methods by which learning can lower cost over tim


Interpretation of equity ratio As equity ratio show the relationship of owner funds to total assets higher the ratio or the share of the shareholders in the total capital of th

Determine the Inputted cost It is hypothetical cost required to be considered to make costs comparable. It is the owner of the factory charges rent of the factory to the cost

Question: (a) The demand for the output of a certain company is very elastic and modern plant recently installed is capable of greatly increased production. Output at present

Analysis of Each Decision Package This analytic procedure permits the manager of the decision package and its alternatives to assess and validate its operation. Numerous quest

Categories of zero base budgeting The preceding discussion will reveal that zero base budgeting is based primarily on: 1) Development of decision units 2) Identification

Balanced Score Card This is a popular approach in current management thinking which consists of a variety of indicators both financial and non-financial. The balanced scorecard

differentiate between multiple product, selling product and margin managent