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
costperunitofactivity parameter can be estimated as the total
(historical) cost divided by (historical) units of activity:
cost
(
)
variable
.
VC x
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 Fall '10
 SUE
 Tpc

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