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Cost equation

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Cost equation

  • This topic has 5 replies, 2 voices, and was last updated 1 year ago by John Moffat.
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  • December 8, 2021 at 9:22 pm #643290
    James124
    Participant
    • Topics: 159
    • Replies: 136
    • ☆☆☆

    Tutor, In Notes chapter 19, you made regression analysis with help of linear function.

    An assumption is made that a cost equation has linear function.
    Why is this? Do we think that only two elements of cost behavior (fixed and variable) affect cost equation or there is any other reason for such assumption?

    December 9, 2021 at 5:18 am #643332
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51573
    • ☆☆☆☆☆

    There are only two elements – fixed costs and variable costs.

    With regression analysis we assume that the variable costs are fixed per unit (and therefore there is a linear relationship). This might not be the case but for regression analysis in Paper MA we assume that to be the case.

    December 9, 2021 at 7:27 am #643353
    James124
    Participant
    • Topics: 159
    • Replies: 136
    • ☆☆☆

    Thank you. You mean to say that variable cost per unit is constant and activity level varies. Activity level increases due to which Total variable cost increases. This is linear relationship, right?

    December 9, 2021 at 4:59 pm #643477
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51573
    • ☆☆☆☆☆

    Correct 🙂

    December 10, 2021 at 5:57 am #643647
    James124
    Participant
    • Topics: 159
    • Replies: 136
    • ☆☆☆

    Thank you tutor.

    December 10, 2021 at 8:42 am #643669
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51573
    • ☆☆☆☆☆

    You are welcome

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