How do you use cost functions?


After preparing the data and estimating the unit variable cost \(V_c^d\) and fixed costs over a period \(FC_p\), we can now use the cost functions we have built to make predictions and set expectations. In either case, actual performance is likely to be slightly (sometimes drastically) different from what was predicted or expected. Such errors are however fundamentally ambiguous: they may indicate that the cost function is wrong, that the performance is wrong, or both…