Lecture 2 - Cost Estimation Flashcards
How do we calculate the slope and intercept of a cost function using the high-low method
Slope = cost at highest cost driver - cost at lowest cost driver / highest cost driver - lowest cost driver
Intercept = Cost at highest cost driver - slope * highest cost driver
What are the advantages and limitations of the high-low method
It is simple to calculate and provides an overview of the relationship between costs and cost drivers
It however is an inefficient use of cost information and has a high sensitivity to outliers at highest/lowest observations of the cost driver
What is regression analysis
Statistical method to measure average change in dependent variable in accordance to a unit change in the IV
What does the standard error show us
Dispersion of actual observations from the regression line, gives accuracy of regression estimate
What does the goodness of fit (R^2) show us
To what extent is a change in DV responsible for the change in IV
What does the T value show us
The validity of independent variable in predicting the dependent variable. It is done by dividing the coefficient slope by the standard error. The higher the better
What does the P value show us
Translating the t value into a probability that the observed relationship is due to change
What is economic plausibility
A subjective assessment of cause-effect
