You are watching: What assumption(s) are frequently made when estimating a cost function?
1. Variable cost function--Total costs change in proportion to the changes in the level of activity in the relevant range.2. Fixed cost function--Total costs do not change with changes in the level of activity in the relevant range.3. Mixed cost function--Both variable and fixed elements. Total costs change but not in proportion to the changes in the level of activity in the relevant range.
A linear cost function is a cost function where, within the relevant range, the graph of total costs versus the level of a single activity related to that cost is a straight line.
"High correlations between two variables means that one is the cause and the other is the effect" Do you Agree? Explain.
No. High correlation merely indicates that the two variables move together in the data examined. It is essential also to consider economic plausibility before making inferences about cause and effect. Without any economic plausibility for a relationship, it is less likely that a high level of correlation observed in one set of data will be similarly found in other sets of data.
1. Industrial engineering method.2. Conference method.3. Account analysis method.4. Quantitative analysis of current or past cost relationships.
The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of a company.Advantages of the conference method include:1. The speed with which cost estimates can be developed.2. The pooling of knowledge from experts across functional areas
Estimates cost functions by classifying cost accounts in the subsidiary ledger as variable, fixed, or mixed with respect to the identified level of activity.
6 Steps in Estimating a Cost Function on the basis of an analysis of a past cost relationship. What is the most difficult step?
1. Choose dependent variable. 2. Identify cost driver.3. Collect data.4. Plot the data.5. Estimate the cost function.6. Evaluate the cost driver of the estimated cost function.Step 3 typically is the most difficult for a cost analyst.
When Using the High-Low Method, should you base the high and low observations on the dependent variable or on the cost driver?
Causality in a cost function runs from the cost driver to the dependent variable. Thus, choosing the highest observation and the lowest observation of the cost driver is appropriate in the high-low method.
Define Learning Curve, Outline 2 Models to be used when incorporating learning into the estimation of Cost Functions
A learning curve is a function that measures how labor-hours per unit decline as units of production increase because workers are learning and becoming better at their jobs. Two models used to capture different forms of learning are1. Cumulative average-time learning model. The cumulative average time per unit declines by a constant percentage each time the cumulative quantity of units produced doubles.2. Incremental unit-time learning model. The incremental time needed to produce the last unit declines by a constant percentage each time the cumulative quantity of units produced doubles.
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4 Frequently Encountered Problems when collecting Cost Data on Variables Included in a Cost FUnction
1. Fixed costs are allocated as if they are variable.2. Extreme values of observations occur.3. The relationship between the cost and the cost driver is not stationary.4. Inflation has occurred in a dependent variable, a cost driver, or both.