An audit manager has just returned from an executive training program and has suggested that the audit department develop a mathematical model to help identify factors that may be causing changes in the cost of production. According to the manager, the model should recognize that the company currently has three separate production (cost) centers.
Which of the following approaches would best provide the analysis suggested by the audit manager?
- Develop a classical variables sampling estimate of cost of production per department, with the sample stratified by the dollar value of each product produced.
- Develop a 3-year ratio analysis of the cost of production compared to the cost of raw inventory across the three departments.
- Develop a multiple regression analysis of production costs, including such variables as raw material inventory costs, number of employees in the department, and overtime pay.
- Develop a linear regression analysis relating the cost of production to the cost of goods sold.
Answer(s): C
Explanation:
Regression analysis extends correlation to find an equation for the linear relationship among variables. The behavior of a dependent variable, such as cost of production, is explained in terms of one or more independent variables (for example, raw material costs, employees, overtime). Thus, multiple regression analysis determines functional relationships among quantitative variables.