Question

Discuss why managers estimate a cost function?
suppose actual cost are higher than estimated cost. Analyze why you may have this difference between actual and estimated costs?

Answer 1

This question is answered in two parts which are 1.why managers estimate a cost function and reason for higher actual cost then estimated cost.

Ans no:1.Managers estimate a cost function because of following objectives:

1. It provides relevant information for decision making to control cost,
2. It assists management for planning,measurement,evaluation and controlling of manufacturing activities,
3. Managers can determine the selling price before manufacturing begins,
4. Managers can determine if the product is cost efficient to manufacture the product etc.

Ans 2:Reasons for difference between actual and estimated cost.

1. Inefficient use of resources in production process,
2. Due to high fluctuation of costs of materials or wages for labour in production process,
3. Costs increased due to abnormal situation like strikes etc,
4. Cost increses due to break-down of machines which effects flow of production etc.