Comtell makes computer peripherals (disk drives, tape drives and printers). Until recently, managers predicted production scheduling and control (PSC) costs to vary in proportion to labour costs according to the following cost function:

Because PSC costs have been growing at the same time that labour cost has been shrinking, Comtell is concerned that its cost estimates are neither plausible nor reliable. Comtell’s controller has just completed regression analysis to determine the most appropriate drivers of PSC costs. She obtained two cost functions using different cost drivers:

1. How should the accountant determine which cost function better predicts PSC costs?

2. During a subsequent month, Comtell’s labour costs were €12,000 and it used 2,000 product components. Actual PSC costs were €31,460. Using each of the preceding cost functions, prepare reports that show predicted and actual PSC costs and the difference or variance between the two.

3. What is the meaning and importance of each cost variance?

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or PSC costs 200% of labour cost = Y = 2 X labour cost