5 Equation for the total cost function Cost equations are derived from historical cost data. Once a cost equation has been established, like the high/low method, it can be used to estimate future costs. In the exam, cost functions will be linear:
y = a + bx
§ ‘a’ is the fixed cost per period (the intercept)www.ExamW.CoM
§ ‘b’ is the variable cost per unit (the gradient)
§ ‘x’ is the activity level (the independent variable)
§ ‘y’ is the total cost = fixed cost + variable cost (dependent on the activity level).
Illustration 6 – Equation for the total cost function
If y = 8,000 + 40x |