Answer
When selecting a cost function and cost driver, consider three main criteria:
1. Economic Plausibility: Ensure that the chosen cost function aligns with the economic realities of the business. It should make sense in the context of how costs behave.
2. Goodness of Fit: The chosen cost function should accurately represent the relationship between the cost driver and the actual costs. It should have a strong statistical fit to the data, minimizing errors.
3. Slope of the Regression Line: Analyze the slope of the regression line, as it provides insights into the cost behavior. A steeper slope suggests a stronger cost-driver relationship.
These criteria help in selecting the most appropriate cost function and cost driver for accurate cost estimation.
Work Step by Step
When selecting a cost function and cost driver, consider three main criteria:
1. Economic Plausibility: Ensure that the chosen cost function aligns with the economic realities of the business. It should make sense in the context of how costs behave.
2. Goodness of Fit: The chosen cost function should accurately represent the relationship between the cost driver and the actual costs. It should have a strong statistical fit to the data, minimizing errors.
3. Slope of the Regression Line: Analyze the slope of the regression line, as it provides insights into the cost behavior. A steeper slope suggests a stronger cost-driver relationship.
These criteria help in selecting the most appropriate cost function and cost driver for accurate cost estimation.
