Chapter 2
The Cost Function

LEARNING OBJECTIVES

Chapter 2 addresses the following questions:

Q1 What are different ways to describe cost behavior? Q2 What is a learning curve? Q3 What process is used to estimate future costs? Q4 How are the engineered estimate, account analysis, and two-point methods used to estimate cost functions? Q5 How does a scatter plot assist with categorizing a cost? Q6 How is regression analysis used to estimate a mixed cost function? Q7 What are the uses and limitations of future cost estimates?

These learning questions (Q1 through Q7) are cross-referenced in the textbook to individual exercises and problems.

COMPLEXITY SYMBOLS

The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems.

Questions Having a Single Correct Answer:
|No Symbol |This question requires students to recall or apply knowledge as shown in the textbook. |
|e |This question requires students to extend knowledge beyond the applications shown in the textbook. |

Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10): ( Step 1 skills (Identifying) ( Step 2 skills (Exploring) ( Step 3 skills (Prioritizing) ( Step 4 skills (Envisioning)

QUESTIONS

2.1 This function has both fixed costs and variable costs. If at least part of the cost is variable; total cost increases as production volumes increase. If at least part of the cost is fixed, the average total per-unit cost decreases because the average fixed cost decreases as volume increases.

2.2 Several years’ worth of data for August would be helpful for estimating the overhead cost function for subsequent Augusts, but the August