Cause-and-Effect vs. Correlation
A cost function is a mathematical description of how costs change. An important issue in estimating a cost function is determining whether a cause-and-effect relationship exists between the level of activity and the costs related to that level of activity.
Explaining whether you think the statement is correct or not, and explaining why or why not? a paragraph.
Cite an example to support your answer.
I believe this statement is correct, but not sure how to explain this if I am correct. If not what is the correct response to the above
This is what I understand:
Cost function is a mathematical description of how a cost changes with the changes in the level of an activity relating to the cost. It is said that managers often estimate cost functions based on two assumptions.
1. Variations in the level of a single activity (cost driver) explain the variations in the related costs.
2. Cost behavior is approximated by a linear cost function with in a relevant range (relevant range is the range of the activity in which there is a relationship between total cost and level of activity.
How would you answer the problem?
You're right, the statement is correct. Examples would include preparing setups for production runs and operating machines. I would also include the fact that cost functions can be shown by plotting ...
The solution provides discussion on the differences between cause and effect versus correlation.