How do you prepare for cost estimation?

Economists often use complex parametric cost functions but management accountants typically do not: they prefer simple linear cost functions. However, to ensure that such simple cost functions provide a valid representation of complex cost behaviors, they have to do some preparatory work. In the next pages, I will explain why management accountants prefer linear cost equations and how they make them work by a careful selection of costs, periods, time windows, cost drivers, and ranges of activity.

To illustrate these different steps, I build in the next video a database we will use all along the rest of this chapter which includes a rich set of cost behaviors. Before watching the videos, download the template for this exercise.

You can also download the solutions for this exercise.

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