I was going thru this AICPA Release question on BEC and I was wondering why choice B is the best answer. Roger Co. implemented activity-based costing in the current year. To select the appropriate driver for Cost Pool A, Roger performed regression analyses for two independent variables, Driver 1 and Driver 2, using monthly operating data. The monthly levels of Cost Pool A were the dependent variables in both regressions. Output results from the regression analyses were as follows:
Driver 1 Driver 2
R squared 0.46 0.80
Intercept $551.00 $970.00
X variable (slope) $ 0.55 $ 0.33
At the budgeted production level for next month, the levels of Driver 1 and Driver 2 are expected to be 5,880 and 7,000, respectively. Based on this information, what is the budgeted amount for Cost Pool A for next month?
A. $2,624 B. $3,280 C. $3,464 D. $3,785
My suggested solution is this:
Cost pool A for Driver 1 = $551 +$0.55(5800) = $3,785
Cost pool A for Driver 2 = $970 + $0.33(7000) =$3,280
Budgeted amount for Cost pool A is $3,785 + $3,280 = $7,065
Unfortunately, my answer is not among the options above. Any help on why ‘B'is the best answer???
You already computed the answer 3280 for driver 2. You only choose driver 2 as the answer because R squared is larger than driver 1. As R squared becomes larger as percentage, it better reflects the variation of changes of Y variable based on changes of x variable.