COMMERCE 2AB3 Lecture Notes - Lecture 14: Multicollinearity, Variable Cost, Dependent And Independent Variables
Document Summary
Cost estimation is the process of developing a well-defined functional relationship between a cost object and its cost driver(s) in order to understand the cost behavior. 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). If costs are mixed, then we need to identify and separate the fixed component from the variable component. This, in turn, helps us to classify costs as either variable or fixed cost. This classification helps managers to make optimal decisions and perform their planning and control functions. 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.
