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Chapter 5

Equation for the total cost function

Cost equations are derived from historical cost data. Once a cost equation has been
established (using methods such as the high/low method which will be revised later
in the course) 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)

 ‘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 (the dependent variable)

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