The controller of Iso-Metsä Oy wants you to estimate a cost function from the following two observations in a general-ledger account called Maintenance:

Month Machine-hours Maintenance costs incurred
January 4000 €3000
February 7000 3900

Required

1 Estimate the cost function for maintenance

Solution

Solution

Answer 1
Slope coefficient= Difference in costs/Difference in machine hours
Slope coefficient= 3900 less 3000/7,000 less 4,000
Slope coefficient= 0.3 per machine hour
Constant = Total Cost less (Slope Coefficient *Quantity of cost driver)
Constant = 3900 less (0.3 *7,000)
Constant = 1800
Cost function = $ 1,800 + 0.30* Machine hours

…………….

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