emba 5403 managerial wk 2
TRANSCRIPT
Fall 2010 Mugan 2/82
Types of Costs
differential costs- (benefits) – costs or benefits that change between/among alternatives
Irrelevant costs -Costs that don’t change are irrelevant to the decision
Choose the alternatives where differential benefits exceed differential costs
Opportunity costs Sunk costs Controllable /avoidable costs/discretionary
costs
The opportunity cost is the monetary amount associated with the next best use of the resource.
Costs that have already been incurred and cannot be changed no matter what action is taken in the future.
Costs that have already been incurred and cannot be changed no matter what action is taken in the future.
Fall 2010 Mugan 3/82
Problems in Identifying and Measuring Benefits
How do I measure the benefit of
employee training?
How do I measure the benefit of
employee training?What is the
monetary benefit of a happy customer?
What is the monetary benefit of a happy customer?
What is the monetary
benefit of an improved working
environment?
What is the monetary
benefit of an improved working
environment?
How do I measure the
benefit of improved quality?
How do I measure the
benefit of improved quality?
Fall 2010 Mugan 4/82
Problems in Identifying and Measuring Costs
What is the cost of a dissatisfied
customer?
What is the cost of a dissatisfied
customer?
How do I measure the
cost of setting my price too
high?
How do I measure the
cost of setting my price too
high?
How do I measure the cost of poor
quality?
How do I measure the cost of poor
quality?
What is the cost of postponing
this year’s training
program?
What is the cost of postponing
this year’s training
program?
Fall 2010 Mugan 5/82
Behavior – how costs react to changes in underlying cost driver Variable or Fixed
Function – related to production or sales Product or Period Product costs –
Direct Material Direct Labor Factory Overhead
Traceability (cost of tracing cost to a cost driver directly should be lower than the benefits.
Classifications of Costs
Fall 2010 Mugan 6/82
Non-manufacturing Costs
Marketing or Selling Costs
Costs necessary to get the order and deliver
the product.
Administrative Costs
All executive, organizational, and
clerical costs.
Fall 2010 Mugan 7/82
Product Costs Versus Period Costs
Product costs include direct materials, direct
labor, and manufacturing
overhead.
Period costs include all marketing or selling costs and administrative
costs. Inventory Cost of Good Sold
BalanceSheet
IncomeStatement
Sale
Expense
IncomeStatement
Fall 2010 Mugan 8/82
WorkRaw Materials In Process
Beginning raw Direct materials materials inventory
+ Raw materials purchased
= Raw materials
available for use in production
– Ending raw materials inventory
= Raw materials used
in production
Product Cost Flows
Fall 2010 Mugan 9/82
WorkRaw Materials In Process
Beginning raw Beginning work in materials inventory process inventory
+ Raw materials Direct materials purchased + Direct labor
= Raw materials + Mfg. overhead available for use = Total manufacturing in production costs
– Ending raw materials inventory
= Raw materials used
in production
Product Cost Flows
Conversion Costs
Prime Costs
Fall 2010 Mugan 10/82
WorkRaw Materials In Process
Beginning raw Beginning work in materials inventory process inventory
+ Raw materials purchased Direct materials
= Raw materials + Direct labor available for use + Mfg. overhead in production = Total manufacturing
– Ending raw materials costs
inventory= Raw materials used
in production
Product Cost Flows
Fall 2010 Mugan 11/82
WorkRaw Materials In Process
Beginning raw Beginning work in materials inventory + process inventory
+ Raw materials + + Total manufacturing purchased = costs
= Raw materials = Total work in available for use process for the in production period
– Ending work in process inventory
= Cost of goods
manufactured
Product Cost Flows
Fall 2010 Mugan 13/82
Manufacturing Cost Flows
FinishedGoods
Cost of GoodsSold
Selling andAdministrative
Period CostsSelling andAdministrative
ManufacturingOverhead
Work in Process
Direct Labor
Balance Sheet Costs Inventories
Income StatementExpenses
Material Purchases Raw Materials
Fall 2010 Mugan 14/82
Graphical Analysis of Activity Costs and Rate of Output
Total Dollars
Start-up Range
Normal Operations
Exceeding Capacity
Output
Curvilinear Total Cost Curve
Curvilinear Total Cost Curve
Marginal CostsMarginal Costs are the costs to produce one
more additional unit of output=slope.Marginal CostsMarginal Costs are the costs to produce one
more additional unit of output=slope.
Fall 2010 Mugan 15/82
Relevant Range The relevant range is the portion of the curvilinear total cost curve that appears
in the normal operations area.
The relevant range is the portion of the curvilinear total cost curve that appears
in the normal operations area. }
Relevant Range
Relevant Range Total
Cost
Output
Total Dollars
Start-up
Range
Normal Operation
s
Exceeding Capacity
Fall 2010 Mugan 16/82
RelevantRange
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
A straight line closely
approximates a curvilinear
variable cost line within the
relevant range.
Activity
To
tal
Co
st
Economist’sCurvilinear Cost
Function
The Linearity Assumption and the Relevant Range
Accountant’s Straight-Line Approximation (constant
unit variable cost)
Fall 2010 Mugan 17/82
Cost Classifications for Predicting Cost Behavior
By reaction to changes in the level of activity within the relevant range.
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity changes.
By reaction to changes in the level of activity within the relevant range.
Total variable costs change when activity changes.
Total fixed costs remain unchanged when activity changes.
Fall 2010 Mugan 19/82
Cost Classifications for Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remainsas activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goesthe same even when the down as activity level goes up.
activity level changes.
Fall 2010 Mugan 20/82
Extent of Variable CostsThe proportion of variable costs differs across organizations. For example . . .
A public utility withA public utility withlarge investments inlarge investments inequipment will tendequipment will tend
to have to have fewerfewervariable costs.variable costs.
A public utility withA public utility withlarge investments inlarge investments inequipment will tendequipment will tend
to have to have fewerfewervariable costs.variable costs.
A manufacturing companyA manufacturing companywill often have will often have manymany
variable costs.variable costs.
A manufacturing companyA manufacturing companywill often have will often have manymany
variable costs.variable costs.
A merchandising companyA merchandising companyusually will have a usually will have a highhigh
proportionproportion of variable costs of variable costslike cost of sales.like cost of sales.
A merchandising companyA merchandising companyusually will have a usually will have a highhigh
proportionproportion of variable costs of variable costslike cost of sales.like cost of sales.
A service companyA service companywill normally have a will normally have a highhigh
proportionproportion of variable costs of variable costs..
A service companyA service companywill normally have a will normally have a highhigh
proportionproportion of variable costs of variable costs..
Fall 2010 Mugan 21/82
Examples of Variable Costs Merchandising companies – cost of goods
sold. Manufacturing companies – direct
materials, direct labor, and variable overhead.
Merchandising and manufacturing companies – commissions, shipping costs, and clerical costs such as invoicing.
Service companies – supplies, travel, and clerical
Fall 2010 Mugan 22/82
ExamplesAdvertising and Research and Development
ExamplesAdvertising and Research and Development
ExamplesDepreciation on Equipment and
Real Estate Taxes
ExamplesDepreciation on Equipment and
Real Estate Taxes
Types of Fixed Costs
DiscretionaryMay be altered in the short-term by current managerial
decisions
DiscretionaryMay be altered in the short-term by current managerial
decisions
CommittedLong-term, cannot be significantly reduced
in the short term.
CommittedLong-term, cannot be significantly reduced
in the short term.
Fall 2010 Mugan 23/82
Activity (minutes)
Mixed Costs
Fixed Monthly
Phone Charge
Fixed Monthly
Phone Charge
To
tal M
ob
ile P
ho
ne
Co
st
X
Y
Total mixed cost
Fall 2010 Mugan 24/82
Fixed Monthly
Phone Charge
Variable
Cost per minute
Activity (minutes)
To
tal M
ob
ile P
ho
ne
Co
st
X
Y
Mixed Costs
Total mixed cost
Fall 2010 Mugan 25/82
Plot the data points on a graph Plot the data points on a graph (total cost vs. activity).(total cost vs. activity).
Plot the data points on a graph Plot the data points on a graph (total cost vs. activity).(total cost vs. activity).
0 1 2 3 4
*
Co
st
10
20
0
***
**
**
*
*
Activity - output
X
Y
The Scattergraph Method
Fall 2010 Mugan 26/82
The Scattergraph Method
Draw a line through the data points with about anDraw a line through the data points with about an
equal numbers of points above and below the line.equal numbers of points above and below the line. Draw a line through the data points with about anDraw a line through the data points with about an
equal numbers of points above and below the line.equal numbers of points above and below the line.
0 1 2 3 4
*
Co
st
10
20
0
***
**
**
*
*
Activity - output
X
Y
Fall 2010 Mugan 27/82
The Scattergraph MethodUse one data point to estimate the total level of activity and the total Use one data point to estimate the total level of activity and the total
cost. cost.
Use one data point to estimate the total level of activity and the total Use one data point to estimate the total level of activity and the total cost. cost.
Intercept = Fixed cost: TL 10
0 1 2 3 4
*
Co
st
10
20
0
***
**
**
*
*
Activity - output
X
Y
Activity 0.8 unitsActivity 0.8 units
Total cost = TL11Total cost = TL11
Fall 2010 Mugan 28/82
The Scattergraph Method
Make a quick estimate of variable cost per unit and determine the cost equation. .
Make a quick estimate of variable cost per unit and determine the cost equation. .
Variable cost per unit = TL1 0.8
= TL1.25/ unit of output
Y = TL10 + TL1.25XY = TL10 + TL1.25XY = TL10 + TL1.25XY = TL10 + TL1.25X
Total Cost at 0.8 units 11 TLLess: Fixed cost 10 TLEstimated total variable cost 0.8 units 1 TL
Total Cost at 0.8 units 11 TLLess: Fixed cost 10 TLEstimated total variable cost 0.8 units 1 TL
Total costTotal cost Number of unitsNumber of units
Fall 2010 Mugan 29/82
The High-Low Method
Assume the following hours of maintenance work and the total maintenance costs for six months.
High level of activity
Low level of activity
Fall 2010 Mugan 30/82
Assigning Costs to Cost Objects
Direct costs Costs that can be
easily and conveniently traced to a unit of product or other cost object.
Examples: direct material and direct labor
Indirect costs Costs that cannot be
easily and conveniently traced to a unit of product or other cost object.
Example: manufacturing overhead
Fall 2010 Mugan 31/82
Cost Classifications for Decision Making
Every decision involves a choice between at least two alternatives.
Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored.
Fall 2010 Mugan 32/82
Differential Costs and Revenues
Costs and revenues that differ among alternatives.
Example: You have a job paying TL 1,500 per month in your hometown. You have a job offer in a neighboring city that pays TL 2,000 per month. The commuting cost to the city is TL 300 per month.
Example: You have a job paying TL 1,500 per month in your hometown. You have a job offer in a neighboring city that pays TL 2,000 per month. The commuting cost to the city is TL 300 per month.
Differential revenue is: TL2,000 – TL1,500 = TL500
Differential cost is: TL 300
Fall 2010 Mugan 33/82
Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.
Example: If you were not attending this program, you could save TL 10,000 per year.
Your opportunity cost?
Fall 2010 Mugan 34/82
Sunk Costs
Sunk costs have already been incurred and cannot be changed now or in the future. They should be
ignored when making decisions.
Example: You bought an automobile that cost TL10,000 two years ago. The TL10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the TL10,000 cost.
Fall 2010 Mugan 35/82
Summary of the Types of Cost Classifications
Financial reporting Predicting cost behavior Assigning costs to cost objects-
products- determining unit costs Decision making
Fall 2010 Mugan 36/82
Income Statement Presentation
Used primarily forUsed primarily forexternal reporting.external reporting.
Used primarily byUsed primarily bymanagement.management.
Fall 2010 Mugan 37/82
Idle Time
The labor costs incurred during idle time are ordinarily
treated as manufacturing overhead.
Machine Breakdowns
Material Shortages
Power Failures
Fall 2010 Mugan 38/82
Overtime
The overtime premiums for all factory workers are usually considered to be part
of manufacturing overhead.
Fall 2010 Mugan 39/82
Unit Costs Direct Material- determined as actual usage
of materials or by engineering estimates (standard costs)
Direct Labor- determined as actual usage of materials or by engineering estimates (standard costs)
MOVH – common production costs assigned to each unit Traditional ABC
Unit cost = DM + DL + MOVH per unit
Fall 2010 Mugan 40/82
Labor Fringe Benefits
Fringe benefits include employer paid costs for insurance programs, retirement plans,
supplemental unemployment programs, Social Security, Medicare, workers’ compensation and
unemployment taxes.
Some companies include all of these
costs in manufacturing
overhead.
Other companies treat fringe benefit
expenses of direct laborers as additional
direct labor costs.
Fall 2010 Mugan 41/82
How to allocate indirect costs to products MOVH
Depends on the nature of products and production system
Traditional- direct labor hours (DLH); number of units produced;
Automation and computer technology have increased the indirect costs in many organizations
Activity-Based Costing (ABC)- a procedure that attempts to provide a more precise indirect cost allocation
Fall 2010 Mugan 42/82
Continue
Numerical Example- Unit Cost
THD Company produces 4,000 units of Product A and 20,000 units of Product B each year.
Direct Material for Product A is TL 10; Product B 15 Total indirect product costs are TL 900,000, and
total direct labor hours(DLH) are 50,000. Product A requires 2.5 DLH and Product B requires
2.0 DLH to produce. Direct labor cost per hour TL 30
Fall 2010 Mugan 43/82
Numerical Example
Management at THD believes that indirect costsManagement at THD believes that indirect costsare actually caused by the following five activities:are actually caused by the following five activities:
EstimatedActivity Costs Machine setups 255,000 TL Quality inspections 160,000 TL Production orders 81,000 TL Machine-hours worked 314,000 TL Material receipts 90,000 TL Total 900,000 TL
Fall 2010 Mugan 44/82
Unit Cost - Traditional
THD uses DLH as the basis1.determine the allocation of MOVH per
unit = predetermined overhead rate(PDOR) PDOR= Total Overhead/ Total DLH
2. determine MOVH per unit = PDOR x DL Cost per hour
3. add DM,DL and MOVH per unit
Fall 2010 Mugan 45/82
PDOR and MOVH
Total Overhead 900,000 TLDirect Labor Hours:Product A - 2.5 DlH 10000Product B - 2 DLH 40000Total Direct Labor Hours 50000Predetermined Overhead Rate 18 TL per DLH
Manufacturing Overhead per unit of A 2.5 DLH 45 TL per unitManufacturing Overhead per unit of B 2 DLH 36 TL per unit
Fall 2010 Mugan 46/82
Unit Costs – Traditional
UNIT COSTS Product A Product BDirect Material 10 15Direct Labor ( DLH x 30 TL / DLH) 75 60Manufacturing Overhead 45 36 Unit Cost 130 111
Fall 2010 Mugan 47/82
Numerical Example-MOVH by ABC
The following activity data was supplied by the management of THD
Activity Total Product A Product B Machine setups 5,000 3,000 2,000 Quality inspections 8,000 5,000 3,000 Production orders 600 200 400 Machine-hours worked 40,000 12,000 28,000 Material receipts 750 150 600
Fall 2010 Mugan 48/82
Numerical Example-MOVH by ABC
This activity data can be used to develop applicationThis activity data can be used to develop applicationrates for each of the five activities.rates for each of the five activities.
Total Rate perActivity Costs Transactions Transaction
Machine setups 255,000 TL ÷ 5,000 = 51 TL Quality inspections 160,000 ÷ 8,000 ?
Fall 2010 Mugan 49/82
Numerical Example-MOVH by ABC
Total Rate perActivity Costs Transactions Transaction
Machine setups 255,000 TL ÷ 5,000 = 51 TL Quality inspections 160,000 ÷ 8,000 = 20.00 Production orders 81,000 ÷ 600 = 135.00 Machine-hours worked 314,000 ÷ 40,000 = 7.85 Material receipts 90,000 ÷ 750 = 120.00
Fall 2010 Mugan 50/82
Numerical Example-MOVH by ABC
Now that we have calculated the application rates, we Now that we have calculated the application rates, we use the rates to assign indirect costs to Product A.use the rates to assign indirect costs to Product A.
Activity ABC Rate Usage Amount Machine setups 51 TL × 3,000 = 153,000 TL Quality inspections 20.00 × 5,000 ?
Fall 2010 Mugan 51/82
Numerical Example-MOVH by ABC
Now that we have calculated the application rates, we Now that we have calculated the application rates, we use the rates to assign indirect costs to Product A.use the rates to assign indirect costs to Product A.
Activity ABC Rate Usage Amount Machine setups 51 TL × 3,000 = 153,000 TL Quality inspections 20.00 × 5,000 = 100,000 Production orders 135.00 × 200 = 27,000 Machine-hours worked 7.85 × 12,000 = 94,200 Material receipts 120.00 × 150 = 18,000 Total indirect costs assigned 392,200 TL Number of units produced ÷ 4,000 Indirect product costs per unit-MOVH 98 TL
Fall 2010 Mugan 52/82
Numerical Example-MOVH by ABC
MOVH costs for a unit of Product BActivity ABC Rate Usage Amount
Machine setups 51 TL × 2,000 = 102,000 TL Quality inspections 20.00 × 3,000 = 60,000 Production orders 135.00 × 400 = 54,000 Machine-hours worked 7.85 × 28,000 = 219,800 Material receipts 120.00 × 600 = 72,000 Total indirect costs assigned 507,800 TL Number of units produced ÷ 20,000 Indirect product costs per unit-MOVH 25 TL
Fall 2010 Mugan 53/82
Reconciliation check
Reconciliation Amount Indirect costs assigned to Product A 392,200$ Indirect costs assigned to Product B 507,800 Total indirect costs assigned 900,000$
Fall 2010 Mugan 54/82
Unit Costs – Using ABC
UNIT COSTS Product A Product BDirect Material 10 15Direct Labor ( DLH x 30 TL / DLH) 75 60Manufacturing Overhead 98.05 25.39 Unit Cost 183.05 100.39
Fall 2010 Mugan 55/82
Comparison of Unit Costs
Traditional Using ABCProduct A 130 183.05Product B 111 100.39
Fall 2010 Mugan 56/82
Activity-based costing is very useful in firms . . .Activity-based costing is very useful in firms . . .
With multipleproducts and
services.That have products
and services that useindirect activitiesin different ways.
That have a highpercentage of indirect
product costs.
Advantages of ABC
Fall 2010 Mugan 57/82
Proper identification Proper identification of cost drivers isof cost drivers is
difficult.difficult. ABC ignores the ABC ignores the
difference betweendifference betweenthe fixed and variablethe fixed and variablecosts of an activity.costs of an activity.
ABC is more costly ABC is more costly because additional because additional measurements and measurements and observations mustobservations must
be made.be made.
Problems With ABC
Fall 2010 Mugan 58/82
Quality of Conformance
When the overwhelming majority of products produced conform to design
specifications and are free from defects.
Fall 2010 Mugan 59/82
Prevention and Appraisal Costs
Prevention Costs
Support activities whose purpose is to
reduce the number of defects
Appraisal Costs
Incurred to identify defective products
before the products are shipped
Fall 2010 Mugan 60/82
Internal and External Failure Costs
Internal Failure Costs
Incurred as a result of identifying defects
before they are shipped
External Failure Costs
Incurred as a result of defective products being delivered to
customers
Fall 2010 Mugan 61/82
Examples of Quality Costs
Prevention Costs• Quality training• Quality circles• Statistical process control activities
Appraisal Costs• Testing & inspecting incoming materials• Final product testing• Depreciation of testing equipment
Internal Failure Costs• Scrap• Spoilage• Rework
External Failure Costs• Cost of field servicing & handling complaints• Warranty repairs• Lost sales
Fall 2010 Mugan 62/82
Distribution of Quality Costs
When quality of conformance is low, total quality cost is high and consists mostly of internal and external failure.
Companies can reduce their total quality cost by focusing on
prevention and appraisal. The cost savings from reduced defects usually
swamps the costs of the additional prevention and appraisal efforts.
Fall 2010 Mugan 63/82
Quality cost reports provide an estimate of the financial
consequences of the
company’s current defect
rate.
Amount Percent* Amount Percent*Prevention costs:
Systems development 400,000$ 0.80% 270,000$ 0.54%Quality training 210,000 0.42% 130,000 0.26%Supervision of prevention activities 70,000 0.14% 40,000 0.08%Quality improvement 320,000 0.64% 210,000 0.42%
Total prevention cost 1,000,000 2.00% 650,000 1.30%
Appraisal costs:Inspection 600,000 1.20% 560,000 1.12%Reliability testing 580,000 1.16% 420,000 0.84%Supervision of testing and inspection 120,000 0.24% 80,000 0.16%Depreciation of test equipment 200,000 0.40% 140,000 0.28%
Total appraisal cost 1,500,000 3.00% 1,200,000 2.40%
Internal failure costs:Net cost of scrap 900,000 1.80% 750,000 1.50%Rework labor and overhead 1,430,000 2.86% 810,000 1.62%Downtime due to defects in quality 170,000 0.34% 100,000 0.20%Disposal of defective products 500,000 1.00% 340,000 0.68%
Total internal failure cost 3,000,000 6.00% 2,000,000 4.00%
External failure costs:Warranty repairs 400,000 0.80% 900,000 1.80%Warranty replacements 870,000 1.74% 2,300,000 4.60%Allowances 130,000 0.26% 630,000 1.26%Cost of field servicing 600,000 1.20% 1,320,000 2.64%
Total external failure cost 2,000,000 4.00% 5,150,000 10.30%Total quality cost 7,500,000$ 15.00% 9,000,000$ 18.00%
* As a percentage of total sales. In each year sales totaled $50,000,000.
Year 2 Year 1
Ventura CompanyQuality Cost ReportFor Years 1 and 2
Fall 2010 Mugan 64/82
Quality Cost Reports: Graphic Form
$10
9
8
7
6
5
4
3
2
1Appraisal
0Prevention Prevention
1 2Year
Qu
alit
y C
ost
(in
mil
lio
ns)
Appraisal
Internal Failure
External Failure
Internal Failure
External Failure
20
18
16
14
12
10
8
6
4
2Appraisal
0Prevention Prevention
1 2Year
Qu
alit
y C
ost
as
a P
erce
nta
ge
of
Sal
es
Appraisal
Internal Failure
External Failure
Internal Failure
External Failure
Quality reports
can also be
prepared in
graphic form.
Fall 2010 Mugan 65/82
Uses of Quality Cost Information
Help managers see the financial significance of
defects.
Help managers identify the relative importance of the
quality problems.
Help managers see whether their quality costs
are poorly distributed.
Fall 2010 Mugan 66/82
ISO 9000 Standards
ISO 9000 standards have become an international measure of quality. To become ISO 9000 certified, a
company must demonstrate:
1. A quality control system is in use, and the system clearly defines an expected level of quality.
2. The system is fully operational and is backed up with detailed documentation of quality control procedures.
3. The intended level of quality is being achieved on a sustained basis.
Fall 2010 Mugan 67/82
Product Life Cycle
http://www.hss.caltech.edu/~mcafee/Classes/BEM106/PDF/ProductLifeCycle.pdf
Fall 2010 Mugan 69/82http://www.hss.caltech.edu/~mcafee/Classes/BEM106/PDF/ProductLifeCycle.pdf
Introduction Growth Maturity Decline
Fall 2010 Mugan 73/82
Simple Regression Analysis Example
Matrix, Inc. wants to Matrix, Inc. wants to know its average know its average
fixed cost and fixed cost and variable cost per unit. variable cost per unit.
Using the data to the Using the data to the right, let’s see how to right, let’s see how to do a regression using do a regression using
Microsoft Excel.Microsoft Excel.
Matrix, Inc. wants to Matrix, Inc. wants to know its average know its average
fixed cost and fixed cost and variable cost per unit. variable cost per unit.
Using the data to the Using the data to the right, let’s see how to right, let’s see how to do a regression using do a regression using
Microsoft Excel.Microsoft Excel.
Fall 2010 Mugan 74/82
Simple Regression Using ExcelYou will need three pieces of You will need three pieces of
information from your information from your regression analysis:regression analysis:
1.1. Estimated Variable Cost per Estimated Variable Cost per Unit (line slope)Unit (line slope)
2.2. Estimated Fixed Costs (line Estimated Fixed Costs (line intercept)intercept)
3.3. Goodness of fit, or RGoodness of fit, or R22
You will need three pieces of You will need three pieces of information from your information from your regression analysis:regression analysis:
1.1. Estimated Variable Cost per Estimated Variable Cost per Unit (line slope)Unit (line slope)
2.2. Estimated Fixed Costs (line Estimated Fixed Costs (line intercept)intercept)
3.3. Goodness of fit, or RGoodness of fit, or R22
To get these three pieces To get these three pieces information we will need to information we will need to useuse three three different Excel different Excel functions.functions.
LINEST, INTERCEPT, & RSQLINEST, INTERCEPT, & RSQ
To get these three pieces To get these three pieces information we will need to information we will need to useuse three three different Excel different Excel functions.functions.
LINEST, INTERCEPT, & RSQLINEST, INTERCEPT, & RSQ
Fall 2010 Mugan 75/82
Simple Regression Using Excel
Place your cursor in Place your cursor in cell F4 and press the cell F4 and press the = key. Click on the = key. Click on the
pull down menu and pull down menu and scroll down to “More scroll down to “More
Functions . . .”Functions . . .”
Place your cursor in Place your cursor in cell F4 and press the cell F4 and press the = key. Click on the = key. Click on the
pull down menu and pull down menu and scroll down to “More scroll down to “More
Functions . . .”Functions . . .”
Fall 2010 Mugan 76/82
Simple Regression Using Excel
Scroll down to the Scroll down to the ““StatisticalStatistical”, ”,
functions. Now functions. Now scroll down the scroll down the
statistical statistical functions until you functions until you
highlight highlight ““LINESTLINEST””
Scroll down to the Scroll down to the ““StatisticalStatistical”, ”,
functions. Now functions. Now scroll down the scroll down the
statistical statistical functions until you functions until you
highlight highlight ““LINESTLINEST””
Fall 2010 Mugan 77/82
Simple Regression Using Excel
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
Fall 2010 Mugan 78/82
Simple Regression Using Excel
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
Here is the Here is the estimate of the estimate of the
slope of the line.slope of the line.
Fall 2010 Mugan 79/82
Simple Regression Using ExcelWith you cursor in cell With you cursor in cell
F5, press the = key F5, press the = key and go to the pull and go to the pull down menu for down menu for
special functions. special functions. Select Select Statistical Statistical and and
scroll down to scroll down to highlight the highlight the
INTERCEPTINTERCEPT function. function.
With you cursor in cell With you cursor in cell F5, press the = key F5, press the = key and go to the pull and go to the pull down menu for down menu for
special functions. special functions. Select Select Statistical Statistical and and
scroll down to scroll down to highlight the highlight the
INTERCEPTINTERCEPT function. function.
Fall 2010 Mugan 80/82
Simple Regression Using Excel
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
Here is the Here is the estimate of the estimate of the
fixed costs.fixed costs.
Fall 2010 Mugan 81/82
Simple Regression Using ExcelFinally, we will Finally, we will determine the determine the ““goodness of goodness of fitfit”, or ”, or RR22, by , by
using the using the RSQRSQ function.function.
Finally, we will Finally, we will determine the determine the ““goodness of goodness of fitfit”, or ”, or RR22, by , by
using the using the RSQRSQ function.function.
Fall 2010 Mugan 82/82
Simple Regression Using Excel
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
1. In the Known_y’s box enter C4:C19 for the range.
2. In the Known_x’s box enter D4:D19 for the range.
Here is the Here is the estimate of estimate of RR22..