Objectives

1. To explain the importance of cost estimation for managerial decision-making.

2. To explain the different methods of cost estimation and their relative advantages and disadvantages.

3. To describe the different types of empirical study which are used in cost estimation.

4. To explain the types of problem which are encountered in statistical cost estimation.

5. To explain how these problems apply in different ways to short-run and long-run situations.

6. To explain how these problems can be overcome.

7. To describe and interpret the different types of cost function in mathematical terms.

8. To explain the specification and estimation of the learning curve.

9. To examine and interpret the findings of various empirical studies.

Introduction

After discussing the theory of demand in Chapter 3 we proceeded to examine the estimation of demand functions in the following chapter. Now that we have discussed the theoretical aspects of production and cost we need to examine the estimation of cost functions.

Importance of cost estimation for decision-making

We have already seen in the previous chapter why managers need to understand the nature and application of cost functions in various aspects of decision-making. Since these functions are not self-evident, they have to be estimated using an appropriate method. Managers cannot apply their knowledge of the firm's cost functions unless these have been estimated in the first place.