An important application of regression analysis in accounting is the estimation

Question

An important application of regression analysis in accounting is the estimation of costs. By collecting data on volume of production and costs, an accountant can estimate the cost associated with a particular manufacturing volume that can be recovered by the company. Additionally, the accountant would specifically find out "sunk costs" from the manufacturing process (a cost that has already been incurred and cannot be recovered). Consider the example of paper bags manufacturing. Collected data in table bellow show cost of production (thousand $) and volume (units) of bags. VolumeProduced CostofProduction 460 1.0 490 5.0 550 5.4 600 5.7 Mean 525

Explanation / Answer

The statistical software output for this problem is:

Simple linear regression results:
Dependent Variable: Cost of Production
Independent Variable: Volume Produced
Cost of Production = -0.69615385 + 0.010897436 Volume Produced
Sample size: 4
R (correlation coefficient) = 0.9183422
R-sq = 0.8433524
Estimate of error standard deviation: 0.35921924

Parameter estimates:

Analysis of variance table for regression model:

Hence,

1 - a) B1 = 0.01

1 - b) B0 = -0.7

Parameter Estimate Std. Err. Alternative DF T-Stat P-value Intercept -0.69615385 1.752743 ? 0 2 -0.39717965 0.7296 Slope 0.010897436 0.003320983 ? 0 2 3.2813886 0.0817

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