0702--02 - Cost estimation The objective of cost estimation...

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Cost estimation The objective of cost estimation is to develop estimates of the parameters of a cost function over some relevant range. Recall that the basic linear cost equation can be written as: cost . VC x FC where VC and FC are the parameters, and cost and x are the variables. To adequately estimate these parameters, it is generally necessary to use historical cost and activity level data. Account analysis method The account analysis method uses (1) information about what a cost is (i.e., direct labor), and (2) historical cost and activity level data, in order to make an assumption about amount of the variable component of the cost, and/or about the fixed component of the cost. Variable cost. In the following case of a variable cost, the fixed cost component is assumed to be zero; and, therefore, the variable- cost-per-unit-of-activity parameter can be estimated as the total (historical) cost divided by (historical) units of activity: cost ( ) variable . VC x
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This note was uploaded on 01/13/2012 for the course ACC 202 taught by Professor Sue during the Fall '10 term at Michigan State University.

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0702--02 - Cost estimation The objective of cost estimation...

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