Question

What assumption(s) are frequently made when estimating a cost function?

1) Cost behavior is approximated by a linear function within the relevant range.
2) Variations in the level of a single activity the variations in the related total costs.
3) Both of the above
4) Neither of the above

Answer 1

In estimating a cost function, it's assumed that costs behave linearly within a certain range and that changes in a single activity level are the primary cause of cost fluctuations. Thus, the option 3 is the correct answer.

Step-by-step explanation:

When estimating a cost function, a couple of assumptions are typically made to simplify the analysis:

1. Cost behavior is approximated by a linear function within the relevant range.
2. Variations in the level of a single activity explain the variations in the related total costs.

Both of these assumptions help in the creation of cost estimates that can be used to predict expenses, make decisions, and plan strategies. Understanding these concepts is vital for businesses to manage their costs effectively.