Curvilinear cost functions.Below are the data and some results of an OLS linear regression.
The explanatory power of the quantity produced and sold (the predictor variable) to explain changes in the size of the indirect manufacturing cost pool is approximately 38%. This exceeds the threshold value for r2 for a reliable relationship of 30%. As a management accountant who is familiar with OLS linear regression modelling, you are, however, uneasy with the results.
In groups of two or three, complete the following requirements.
1. What output causes your unease?
2. What step did you miss, and what should you do at this point?
3. Examine the plot of the residuals. How would the management team interpret this result?
What is the next step?
4. Refer to the table of data. Using Excel, plot the actual values of the quarterly MOH cost pool. Click on the box to report R2 and add a logarithmic trendline. Below is an illustration of the result of your Excel plot. What does this step of the specification analysis tell a management accountant?
5. Using Excel, plot the average-cost-per-unit curve including a trendline. Of what use is this information to the management team?