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Lesson 4.2 Cost Estimation 2024

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12 views4 pages

Lesson 4.2 Cost Estimation 2024

Uploaded by

Arnold Miano
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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EVALUATION OF THE REGRESSION

MODEL

Testing the whole model


Tests of the whole model are used to determine
the reliability of all the independent variables
taken together. The measures used are:

Coefficient of determination (r2)


Std error of the estimate

I. Coefficient of Determination (r2)


If the regression line calculated by the least
square method were to fit the actual observations
perfectly, then all observed points would lie on the
regression line. The coefficient of determination,
r2, explains the amount of variation in Y which is
explained by the introduction of X in the model. A
perfect linear relationship between X and Y would
result in r2 being equal to 1.

r2 = explained variation
Total variation
=  (Ŷ - ý) 2

 (Y- ý)2
Where ý is the mean value of Y

For computation purposes r2 can be given by


r2 = (n  xy -  x x)2 ________
[n x2 -( x)2] [n y2 – (y)2]

From the illustration 2.1

compute r2

Note
The higher the r2, the better the function is. As a
rule of thumb, r2 must be at least equal to 0.8.

II. Standard error of estimate (Se)


The coefficient of determination r2 gives us an
indication of the reliability of the estimate of total
cost based on the regression equation but it does
not give us an indication of the absolute size of the
probable deviations from the line established.
This information can be obtained by calculating
the standard error of estimate given by the
following formula.

Se = √ (Y −Y^ )2
∑ n−2
For computation purpose,

Se = √ ∑ Y 2−a ∑ Y −b ∑ XY
n−k−1
Where k is the no. of independent variables

Standard error is similar to standard deviation in


normal probability analysis. It is a measure of
variability around the regression line. The std
error of estimates enables us to establish a range
of values of the dependent variable within which
we may have some degree of confidence that the
true value lies. We can use the following equation
to establish this range:

Ŷ – t cSe ≤Y ≤ Ŷ + tcSe

EXAMPLE if where Ŷ34 = 284.48, the 95%


confidence interval can be calculated as follows:

284.48 - 2.2281(48.95) ≤ Y ≤ 284.48 + 2.2281


(48.95)

≤ Y ≤ 393.6

We are 95% confident that if X is estimated to be


34 units next period, the true Y will lie between
175.4 and 393.6. Note tc from the student T
tables, with 10 degrees of freedom and 5%
significance level, is equal to 2.2281.

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