COMMERCE 2AB3 Lecture Notes - Lecture 10: Westjet, Fixed Cost, Cost Estimate
11 Feb 2015
School
Department
Course
Professor
Document Summary
Cost estimation is process of developing a well-defined functional (i. e. , mathematical) expression that explain the relationship between a cost object and its cost driver(s) in order to understand its cost behavior pattern. Cost behaviour describes the way that the total amount spent of a specific cost item on a cost object reacts to changes in its cost driver(s) (e. g. , production quantity or sales volume). There three possible cost behavior: variable, fixed and mixed. It is a mathematical expression describing how the total costs of a cost item (object) change with changes in the level of a related cost driver(s). 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:
