Forecasting Costs

One of the major objectives of cost analysis is to enable the manager to predict the financial outcomes of decisions. To accomplish this, the future costs and benefits of alternative courses of action must be determined. If care- fully used, information about past financial performance can be helpful in this analysis despite the fact that, by definition, financial reporting information is historical. In many cases, both revenues and costs need to be estimated for decision- making. For the production manager, additional revenue is a result of increased throughput or recovery of valuable material from the stream of mined material. A reduction in operating cost, although similar to a revenue increase in its financial impact, is estimated using slightly different techniques. Generally, the estimation of cost is more difficult than the estimation of revenue. Most cost estimates have two components: an estimate of fixed costs and an estimate of variable costs. As discussed in chapter 5, the total cost of an activity during a specified period can be expressed as: Total cost = (Variable cost per unit of activity) x (Units of activity) + Fixed cost or TC = VX+F