Determining How Costs Behave

Linear Cost Functions

• Negotiations between Cannon Services and
World Wide Communications (WWC)
• Alternative 1: $5 per minute used
 Linear Cost Functions
• Alternative 2: $ 10,000 total price (no minutes
measure)
 Linear Cost Functions
• Alternative 3: $3,000 per month plus $2 per
minute used.
 Linear Cost Functions
• Considering 4000 minutes will be used
• Which alternative is better?
 Cost Estimation Methods
• Qualitative Methods
• Industrial Engineering Method (BOSE and
NOKIA used to do it)
• Conference Method
• Account Analysis Method
 Cost Estimation Methods
• Quantitative Methods
• High and Low
• Regression Analysis
 Steps in Estimating a Cost Function
Using
Quantitative Analysis
• Choose the dependent variable.
• Identify the independent variable, or cost
driver.

• Collect data on the dependent variable and

the cost driver.
 Types of Datas
• Time-series data pertain to the same entity
(organization, plant, activity, and so on) over
successive past periods.
• Cross-sectional data pertain to different
entities during the same period.
 Steps in Estimating a Cost Function
Using
Quantitative Analysis
• Plot the data
• Estimate the cost function.
Steps in Estimating a Cost Function
Using Quantitative Analysis
Steps in Estimating a Cost Function
Using
Quantitative Analysis
High-Low Method
High-Low Method
Regression