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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