Identify the Three Different Cost Estimation Techniques and Provide a Description

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Examlex · Accepted Answer

The Answer is Scatter Diagrams: Scatter diagrams help identify representative high and low volumes. They are also useful in determining if costs can be reasonably approximated by a straight line. Scatter diagrams are simple to use, but professional judgment is required to draw a representative straight line through the plot of historical data. This method is subjective in nature, and probability intervals cannot be developed.
High-Low Cost Estimation: This method uses data from two time periods to estimate fixed and variable costs. This is a good method to use when data are limited. It is a subjective method, and probability intervals cannot be developed. It is very important that the high and low volumes represent the normal operating conditions of all observations. Again, professional judgment is required to select the appropriate data.
Least-Squares Method: This method uses all available data. It uses a mathematical criterion, which provides for an objective approach to cost estimation. In addition, this method can provide information on how well the cost estimating equation fits the historical cost data and information needed to construct probability intervals for cost estimates. It can also be used to develop equations that are not linear in nature. This method requires more data points than do the high-low or scatter diagram methods.

Identify the Three Different Cost Estimation Techniques and Provide a Description

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