COMMERCE 2AB3 Lecture Notes - Lecture 2: Cost Estimate, Cost Driver, Fixed Cost
23 Jan 2018
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Document Summary
Cost estimation is process of developing and estimating a well-defined cost function that explains how the total amount spent on a cost object react to the changes in its cost driver(s). There are several methods for cost estimation. The most common ones are high-low method and regression analysis. In this chapter, we cover only the high-low (h-l) method. Basic assumptions (1) changes in total costs can be explained by changes in the level of a single cost driver. (2) cost behavior can adequately be approximated by a linear function of the activity level within the relevant range. Total costs fixed cost component slope coefficient (variable cost rate) the volume (quantity) of the cost driver where: The high-low method uses the highest and lowest activity levels of a data set to estimate the portion of a mixed cost that is variable and the portion that is fixed.
