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Least Square Prob - Updated

The least squares regression method is a reliable technique for separating fixed and variable costs from mixed costs using linear regression analysis. It utilizes all data points to create a best fit line, represented by the equation y = a + bx, where y is total cost, a is fixed cost, b is variable cost, and x is the number of units. The document also provides a practical exercise to estimate the total cost of producing 4,000 units using this method, along with formulas for calculating the fixed and variable costs.

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6 views2 pages

Least Square Prob - Updated

The least squares regression method is a reliable technique for separating fixed and variable costs from mixed costs using linear regression analysis. It utilizes all data points to create a best fit line, represented by the equation y = a + bx, where y is total cost, a is fixed cost, b is variable cost, and x is the number of units. The document also provides a practical exercise to estimate the total cost of producing 4,000 units using this method, along with formulas for calculating the fixed and variable costs.

Uploaded by

s696ft4fsh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Least squares regression method is a method to segregate fixed cost and variable cost

components from a mixed cost figure. It is also known as linear regression analysis.

Least squares regression analysis or linear regression method is deemed to be the most accurate
and reliable method to divide the company’s mixed cost into its fixed and variable cost
components. This is because this method takes into account all the data points plotted on a graph
at all activity levels which theoretically draws a best fit line of regression.

Linear regression is basically a mathematical analysis method which considers the relationship
between all the data points in a simulation. All these points are based upon two unknown
variables; one independent and one dependent. The dependent variable will be plotted on the
y-axis and the independent variable will be plotted to the x-axis on the graph of regression
analysis. In literal manner, least square method of regression minimizes the sum of squares of
errors that could be made based upon the relevant equation.

The least squares regression method follows the same cost function as the other methods used to
segregate a mixed or semi variable cost into its fixed and variable components. Let’s assume that
the activity level varies along x-axis and the cost varies along y-axis. The following equation
should represent the required cost line:

y = a + bx
Where,
●​ y = total cost
●​ a = total fixed cost
●​ b = fixed cost
●​ x = number of unit

Exercise 1
Based on the following data of number of units produced and the corresponding total cost,
Estimate the total cost of producing 4,000 units. Use the least-squares linear regression
method.

Units Cost
Month
1 1,520 $36,375
2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800
Formulas
By using mathematical techniques, the following formulas to calculate a and b may be
derived:

nΣxy − (Σx)(Σy)
Unit Variable Cost (b) =
nΣx2 − (Σx)2

Σy − bΣx
Total Fixed Cost (a) =
N
Where,​
n is number of pairs of units–total-cost used in the calculation;​
Σy is the sum of total costs of all data pairs;​
Σx is the sum of units of all data pairs;​
Σxy is the sum of the products of cost and units of all data pairs; and​
Σx2 is the sum of squares of units of all data pairs.

Show ur computation

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