What two assumptions are frequently made when estimating a cost function?
1. Variations in the level of a single activity (the cost driver) explain the variations in the related total cost
2. Cost behavior is approximated by a linear cost function within 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 forms a straight line.
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Managerial Accounting
- Define Opportunity Cost.
- Can the constant in the cost function be used as an estimate for fixed cost (when calculating maintenance, etc.)?
- Describe the account analysis method for estimating a cost function.
- Name 4 approaches to estimating a cost function ?
- Describe three alternative linear cost functions ?
- Define Cost-Volume-Profit Analysis ?
- Define Operating Leverage ?
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