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 labor costs according to the following cost function:

PSC costs = 200% of labor cost

i.e.

Y = 2 x$ laborcost

Because PSC costs have been growing at the same time that labor cost has been shrinking (reducing), Comtell is concerned that its cost estimate is 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:

Y = $10,000 per month + (11 * number of components used); where R² = 0.782

and

Y = 2 * labor cost ; where R² = 0.233

REQUIRED:

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

2. During a subsequent month, Comtell’s labor costs were $12,000, and it used 2,000product 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.