CHAPTER 2

The Cost Function

imagesIn Brief

Managers need a basic understanding of the organization's costs if they are to react quickly to change and create successful organizational strategies and operating plans. Managers use classifications and estimation techniques to understand and anticipate future cost behavior. They can then estimate relevant costs to help make decisions and plan future operations.

This Chapter Addresses the Following Questions:

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

FLYING LOW DURING AN ECONOMIC DOWNTURN

Airlines operate in a cyclical industry, so their managers are accustomed to periodic business declines. However, the airlines have been especially subject to one-time or unusual events in recent years. For example, an ash plume from the Eyjafjallajokull volcano in Iceland caused suspension of European air traffic for five days during April 2010. Over 100,000 flights were canceled, and direct airline losses were estimated at more than $1.3 billion (Lekic, 2010). The terrorist events that occurred on September ...

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