Describe and compare the three cost estimation methods used to develop a cost equation.
What will be an ideal response?
The three methods are scatter diagram, the high-low method, and least-squares
regression. Scatter diagrams plot data in graphical form and a line is drawn to reflect the relation between cost and unit volume. With the high-low method, only the data point for the highest and lowest volumes of activity are used to determine a line. Least-squares regression is a statistical method best done with a spreadsheet or calculator. The three methods will differ slightly in their estimates, with least-squares regression being the most precise, scatter diagrams being the most subject to interpretation, and the high-low method being the least accurate if the extreme values don't reflect normal activity, but it is easiest to apply to obtain a quick cost equation estimate.
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What will be an ideal response?
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Fill in the blank(s) with the appropriate word(s).