Management Accounting: Regression Analysis and Cost Allocation Methods

MANAGEMENT ACCOUNTING
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MANAGEMENT ACCOUNTING
Question 1
(d) The data for running the regression analysis is indicated below.
Also, the factory manager is of the opinion that the overhead costs are not only dependent on
the genomes production but also on the kiln hours and direct labour hours involved. Hence, a
regression has been run with overhead costs as the dependent variable and all the other three
parameters as the independent variables. The result obtained is highlighted below.
From the above output, the equation of the regression model is indicated below.

MANAGEMENT ACCOUNTING
Monthly Overhead Costs = 36335.61 + 160.68*Genomes Produced + 4.58*Total Direct
Labour Hours + 17.87Kiln Hours
As per the flexed budget, the annual sales volume is estimated to be 761 genomes and hence
the average monthly sale/production would be (761/12) = 63.417
Total monthly direct labour hours budgeted = (12+15)*63.417 = 1712.25
Total monthly kiln hours budgeted = 8*63.417= 507.33 hours
Hence, estimated flexed monthly overhead costs = 36335.61 + 160.68*(63.417) +
4.58*(1712.25) + 17.87*(507.33) = $63,438.44
Therefore, estimated annual overhead costs for the year ending on March 31, 2019 =
63438.44*12 = $761,261.26
Estimated Annual Fixed Overhead Cost = 36335.61*12 = $ 436,027
Estimated Annual Variable Overhead Cost = 761,261 - 436,027 = $325,234
Comparison & Suggestion
The comparison of the estimated obtained from account method and regression approach is
carried out below.
From the above comparison, it is apparent that the regression method would be preferred
method since the estimated overhead cost along with the respective breakup is closer to the
actual overhead costs for this method as compared to the account method and hence it would
be preferable (Drury, 2016).