ADMS 2510 Lecture Notes - Lecture 2: Scatter Plot, Gross Profit, Income Statement

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ceruleanchinchilla657

7 Dec 2016

School

York University

Department

Administrative Studies

Course

ADMS 2510

Professor

Li Zhi Ma

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ADMS 2510 Full Course Notes

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Adms 2510 week of september 21, 2016 cost behaviour. Y = total cost, a = fc, b = vc, x is cost driver for vc, bx is the total vc in y = a + bx. Y = a + b1x1 + b2x2 + b3x3. Scatter graph method: draw line through data points with about an equal number of points above and below the line. Use ruler to measure fc use one data point to estimate total level of activity and the total cost. Lastly, estimate vc per unit and determine the cost equation. Least squares regression method: when scatter plot reveals approximately linear relation between x & y. Uses all data points to estimate fixed and variable costs, fit a straight line to minimum sum of the squared errors. Three methods give slightly different estimates, which is normal because each method uses different a(cid:373)ou(cid:374)ts of data poi(cid:374)ts.

Related Questions

PROBLEM 2-22 High-Low and Scattergraph Analysis (L02-4, LO2-5) Pleasant View Hospital of British Columbia has just hired a new chief administrator who is anx- ious to employ sound management and planning techniques in the business affairs of the hospital. Accordingly, she has directed her assistant to summarize the cost structure of the various depart- ments so that data will be available for planning purposes. The assistant is unsure how to classify the utilities costs in the Radiology Department because these costs do not exhibit either strictly variable or fixed cost behavior. Utilities costs are very high in the department due to a CAT scanner that draws a large amount of power and is kept running at all times. The scanner can't be turned off due to the long warm-up period required for its use. When the scanner is used to scan a patient, it consumes an additional burst of power. The assistant has accumulated the following data on utilities costs and use of the scanner since the first of the year. Month Number of Scans Utilities Cost [ 60 January February .... March April May ....... June July ........- August September October $2,200 $2,600 $2,900 $3,300 $3,000 $3,600 $4,000 $3,600 $3,100 $2,500 130 150 140 The chief administrator has informed her assistant that the utilities cost is probably a mixed cost that will have to be broken down into its variable and fixed cost elements by use of a scatter- graph. The assistant feels, however, that if an analysis of this type is necessary, then the high-low method should be used, since it is easier and quicker. The controller has suggested that there may be a better approach. Required: 1. Using the high-low method, estimate a cost formula for utilities. Express the formula in the form Y = a + bx. (The variable rate should be stated in terms of cost per scan.) 2. Prepare a scattergraph by plotting the number of scans and utility cost on a graph. Draw a straight line though the two data points that correspond to the high and low levels of activity. Make sure your line intersects the Y-axis. Comment on the accuracy of your high-low estimates assuming a least-squares regression analysis estimated the total fixed costs to be $1,170.90 per month and the variable cost to be $18.18 per scan. How would the straight line that you drew in requirement 2 differ from a straight line that minimizes the sum of the squared errors?

ADMS 2510 Lecture Notes - Lecture 2: Scatter Plot, Gross Profit, Income Statement

ADMS 2510 Full Course Notes

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