STRATEGIC COST

MANAGEMENT

PRESENTED BY: GROUP 2

CHAPTER 2
Cost Classification
Cost Behavior Patterns
Methods of Aggregating Mixed Cost
Correlation Analysis
 COSTS
• Value foregone or resources sacrificed for the purpose of achieving some economic benefit that
will promote the profit-making ability of a firm.
• Incurred when a resource is used for some purpose.
• An outlay or expenditure of money to acquire goods & services that can assist in performing
operations

• May be classified differently according to the immediate

needs of management.
• Classified differently depending on the type of
organization involved:
o Manufacturing,
o Merchandising,
o & Service.
• Cost data classified & recorded in a particular way for one
purpose may be inappropriate for another.
NATURE OF COST POOLS, OBJECTS, & DRIVERS

COST POOLS
• Costs collected into meaningful
groups.
• May be classified by:
o Type
o Source
o Responsibility

COST OBJECTS
• Costs assigned to any
product, service, or
organizational unit for some
management purpose.

COST DRIVERS
• Any factor that has the
effect of changing the level
of total cost.
COST ASSIGNMENT

Cost Assignment:
• the process of assigning costs to cost pools or from cost pools to cost object.

Cost Allocation:
• the assignment of indirect costs to cost pools.

Allocation Bases:
• cost drivers used to allocate costs
CLASSIFICATION OF COSTS:
A. Nature or Management Function
B. Timing of Recognition
C. Financial Statements
D. Cost Behavior
E. Types of Inventory
F. Traceability to Cost Objective
G. Managerial Influence
H. Planning & Control
I. Time Frame/Commitment to Cost Expenditure
J. Period of Incurrence
K. Decision Making & Other Analytical Purposes
 A. NATURE OR MANAGEMENT FUNCTION
MANUFACTURING COSTS NONMANUFACTURING COSTS
• Direct Materials • Marketing Costs
• Direct Labor • General and Administrative Costs
• Manufacturing Overhead
o Indirect Materials
CLASSIFICATION o Indirect Labor
OF COSTS
ACCORDING TO: B. TIMING OF RECOGNITION AS EXPENSE
• PRODUCT COSTS
• PERIOD COSTS

C. FINANCIAL STATEMENTS
• THE STATEMENT OF FINANCIAL POSITION
• THE INCOME STATEMENT
INCOME STATEMENT:
MERCHANDISING &
MANUFACTURING
COMPANY:
 A. NATURE OR MANAGEMENT FUNCTION
MANUFACTURING COSTS NONMANUFACTURING COSTS
• Direct Materials • Marketing Costs
• Direct Labor • General and Administrative Costs
• Manufacturing Overhead
o Indirect Materials
CLASSIFICATION o Indirect Labor
OF COSTS
ACCORDING TO: B. TIMING OF RECOGNITION AS EXPENSE
• PRODUCT COSTS
• PERIOD COSTS

C. FINANCIAL STATEMENTS
• THE STATEMENT OF FINANCIAL POSITION
• THE INCOME STATEMENT
 D. PREDICTING COST BEHAVIOR
• VARIABLE COSTS
• FIXED COSTS
• SEMI-VARIABLE COSTS

E. TYPES OF INVENTORY
• RAW MATERIALS
• WORK-IN-PROCESS
CLASSIFICATION
• FINISHED GOODS
OF COSTS
ACCORDING TO:
F. TRACEABILITY TO COST OBJECTIVE
• DIRECT COSTS
• INDIRECT COSTS

G. MANAGERIAL INFLUENCE
• CONTROLLABLE COSTS
• NONCONTROLLABLE COSTS
 H. PLANNING & CONTROL
• STANDARD COSTS • DIRECT COSTS
• BUDGETED COSTS • INFORMATION COSTS
• ABSORPTION COSTS • ORDERING COSTS
• OUT-OF-POCKET COSTS

I. A TIME-FRAME PERSPECTIVE
• COMMITTED COSTS
CLASSIFICATION• DISCRETIONARY COSTS
OF COSTS
ACCORDING TO: J. TIME PERIOD FOR WHICH THE COST IS INCURRED
• HISTORICAL COSTS
• FUTURE COSTS

K. DECISION MAKING & OTHER ANALYTICAL PURPOSES

• RELEVANT COSTS • MARGINAL COSTS
• INCREMENTAL COSTS • VALUE-ADDED COSTS
• SUNK COSTS
• OPPORTUNITY COSTS
ILLUSTRATIVE PROBLEM ON COST CLASSIFICATIONS:
Bettina Cabrera is the production manager of a ready-to-wear manufacturing outfit. A
decision needs to be made about the type of clothing material or fabric to be used to make a
shirt. The fabric that has been used is the previous production cost P40 per yard but it's not
available currently. Similar material from another supplier will cost P50 per yard.
The COST OF FABRIC can be classified as:
1. Time Period
o P40.00 - Historical Cost
o P50.00 - Future Cost
2. Management Function
o The cost of the fabric is a manufacturing cost
3. Accounting Treatment
o Whatever is paid for the fabric will be capitalized as a product cost & carried in inventory
until sold.
4. Traceability to Product
o The fabric is a direct cost because it represents a significant portion of the cost of the product
& can be traced to a specific unit of finished product.
ILLUSTRATIVE PROBLEM ON COST CLASSIFICATIONS:
Bettina Cabrera is the production manager of a ready-to-wear manufacturing outfit. A
decision needs to be made about the type of clothing material or fabric to be used to make a
shirt. The fabric that has been used is the previous production cost P40 per yard but it's not
available currently. Similar material from another supplier will cost P50 per yard.
The COST OF FABRIC can be classified as:

5. Cost Behavior
o Both the P40 & P50 cost per yard are variable costs. As the number of yards purchased
increases, the total fabric costs increases proportionately.
6. Decision Significance
o The P50 cost is relevant because it can be compared with the price of other fabrics of similar
quality to select the best alternative. The P40 is irrelevant.
7. Managerial Influence
o The cost of the fabric to be acquired is a controllable cost since Cabrera has the authority to
make production decisions.
8. Others
o The fabric is an out-of-pocket cost associated until producing additional shirts which will
involve cash outlay in its acquisition.
COST BEHAVIOR
PATTERNS
 COST BEHAVIOR 15

• How costs change as business activity levels change

• Knowing how costs behave helps managers predict future costs
• Understanding cost behavior is essential to adequate decision
making in the planning and control of firm activity.

IMPORTANCE OF UNDERSTANDING COST BEHAVIOR

• PLANNING - management make decisions based on future
expectations. Expectations should be based on data that
is relevant to the decision objectives. Failure in this activity
could mean displacement costs due to unexpected events.
• CONTROL - process of comparing actual results with
expectations and implement actions based on the
comparison.
 COST BEHAVIOR 16

• COST ANALYSIS - It is an integral part that helps in

planning and control as it helps organizations make
informed financial decisions and optimize their
operations.

RELEVANT RANGE
• It is the range activity within which assumptions
relative to variable cost and fixed cost behavior are
valid. The normal range where your costs behave as
expected.
• Outside of that relevant range, revenues and expenses
will likely differ from the expected amount.
TYPES OF COST BEHAVIOR
17
PATTERNS
1. VARIABLE COSTS
- Costs that change in total as the level of activity changes
in the short run (period to allow changes in the level of
production or other activity) and within the relevant
range.
Example:
Manufacturing – Direct Materials, Direct Labor,
Manufacturing Overhead, Distribution
Cost, & Sales Commission
Merchandising - Cost of Sales & Sales Commission
Services – Direct Labor & Direct Materials used to
perform the services
 18
TYPES OF COST BEHAVIOR PATTERNS

Variable Cost Behavior

TYPES OF COST BEHAVIOR 19

PATTERNS

2. FIXED COSTS
- Costs that remain constant regardless of the
level of activity.
Factor of Change: Price Change (Outside Forces)
- Sometimes referred as CAPACITY COST
- Expenditure made for building, equipment,
skilled professional employees and other items
needed to provide the basic capacity for
sustained operations.
TYPES OF COST BEHAVIOR 20

PATTERNS
Level of Fixed Cost per Total Fixed
Activity Unit Cost
1 2,000 2,000
200 10 2,000

- React in inversely with change in activity

- As the activity level increases, per unit decreases
and as the activity level decreases, per unit increases
 21
TYPES OF COST BEHAVIOR PATTERNS

Fixed Cost Behavior

TYPES OF FIXED COSTS 22

1. Committed Fixed Costs

- Costs that represents long-term commitments.
Example: Depreciation on equipment or
buildings, Taxes on real estate, Insurance, &
Salaries of top management and operating
personnel
Key Features:
- Long-term in nature
- Cannot be significantly reduced for short
periods of time without impacting the
organization's profitability or long-term goals.
TYPES OF FIXED COSTS 23

2. Discretionary Fixed Costs/Managed

Fixed Costs
- Costs that are usually arise from annual
management decisions.
Example: Advertising, Research, Public
relations, Management development
programs, & Internships for students
Key Features:
Can be adjusted or modified as needed.
 FIXED COST AND THE RELEVANT24
RANGE
- The level of Discretionary fixed costs are
planned costs like advertising and training
that are set at the beginning of the year.
These costs depend on the expected level of
activity. If the activity is high, these
programs are usually expanded.
 FIXED COST AND THE RELEVANT25
RANGE
Scenario:
- Zesty Beverages Inc. plans to increase sales by 25%, so
it raises its advertising budget from ₱1M to ₱2.5M
for TV, social media, and influencer ads. Once this
budget is set and spent, it remains fixed regardless of
actual sales. If sales rise as planned, the company
benefits, but if they don’t, the advertising cost stays
the same. This shows that discretionary fixed costs
are influenced by planning but do not change
based on actual sales performance
TYPES OF COST BEHAVIOR
26
PATTERNS
3. MIXED COST/ SEMI-VARIABLE COST
- Costs that contains both variable and fixed cost
elements.
EXAMPLE:
- Maintenance Cost and Electric Utility Costs
- The relationship between mixed cost and the level
of activity also be expressed in the following
equation
Y= a + bX
TYPES OF COST BEHAVIOR
27
PATTERNS

Where:
- Y= total mixed cost (dependent variable)
- a= total fixed costs (Vertical intercept of the line)
- b= the variable cost per unit activity (slope of the
line)
- X = the level of activity (the independent variable)
METHODS OF
ESTIMATING THE
RELATION
BETWEEN COST
BEHAVIOR AND
ACTIVITY
LEVELS
 29

1. ACCOUNT ANALYSIS METHOD

2. INDUSTRIAL ENGINEERING METHOD OR
WORK MEASUREMENT METHOD
3. CONFERENCE METHOD
4. QUANTITATIVE ANALYSIS OF CURRENT
AND PAST COSTS RELATIONSHIPS:

A. HIGH-LOW METHOD
B. REGRESSION ANALYSIS METHOD:

i. THE LEAST-SQUARES REGRESSION

METHOD
ii. SCATTERGRAPH OR VISUAL FIT
METHOD
 30

ACCOUNT ANALYSIS
• A useful and easier way to estimate costs.
• Utilizes the experience and judgment of
managers and accountants.
• Identifies costs as either fixed or variable
based on their relationship to activity
levels.
The account analysis involves the following 31

steps:
1. Review each cost account used to record the costs that are
of interest. Each cost is identified as either fixed or
variable depending on the relationship between the cost
and some activity.
Fine Dining Restaurant
Rent ($5,000/month) Fixed
Food Ingredients ($5 per meal) Variable
Chef’s Salary ($3,500/month) Fixed
Utility Bills ($2,000/month + Usage) Mixed
The account analysis involves the following 32

steps:
2. Each major class of manufacturing overhead or other mixed
cost is itemized. Each cost is then divided into its estimated
variable and fixed components. This is done on the basis of the
experience and judgment of accounting and other personnel.
Total Cost (Per
Cost Item Fixed Component Variable Component
Month)
Utilities (Electricity, $2 per customer
$3,500 $1,500
Gas, Water) served
Kitchen & Dining
Supplies (Napkins,
$2,000 $800 $1 per table served
Dish Soap, Candles,
etc.)
INDUSTRIAL ENGINEERING 33

METHOD
• Estimates cost functions by analyzing the relationship
between inputs and outputs in physical forms.
• Initially used in estimating manufacturing costs from
industrial engineers specifications of the required input
to the manufacturing process for a unit of manufactured
output.
• Also applied in nonmanufacturing operations, such as
banks, fast food companies, government units, hospitals,
and more.
Steps in Applying the Engineering Method of Estimating 34

Costs:
1. A study of the physical relation between the quantities of inputs
(material. labor, etc.) and each unit of output (finished product) is
done. This involves the following activities.
A. A detailed step-by-step analysis of each phase of each
manufacturing process together with the kinds of work performed,
and time to perform each step is done. (This is sometimes part of
time-and-motion study). This serves as a basis for estimating direct
labor time.
B. Engineering estimates of the materials required for each unit of
production are obtained from drawings and specifications sheets.
Steps in Applying the Engineering Method of Estimating 35

Costs:

2. Costs are then assigned to each of the

physical inputs (wages, material price,
insurance charges, etc.) to estimate the
cost of the outputs.
 36

CONFERENCE METHOD
• Cost functions are estimated based on the analysis and
opinions about costs and their drivers obtained from
various departments of an organization such as
purchasing, process engineering, manufacturing,
employee relations and so on.

• This information is used to determine the selling price of

the product, optimum product mix and evaluate cost
improvements over time.
 37

CONFERENCE METHOD
• Allows quick development of cost functions and cost
estimates.

• Its credibility is gained through the pooling of expert

knowledge from each value-chain area.

• The accuracy of the cost estimates is dependent largely on

the objectivity, care, and the detail taken by the people
providing the inputs or information.
QUANTITATIVE
ANALYSIS OF
CURRENT AND
PAST COSTS
RELATIONSHIPS
 39

HIGH-LOW METHOD
• based on costs observed at both
the high and low levels of
activity within the relevant
range.
Steps in Applying the High-Low Cost 40

Estimation
1. Obtain relevant data on past costs and
related actual activity levels.
2. Estimate the variable cost per unit or
rate using the following equation.
Steps in Applying the High-Low Cost Estimation 41

3. Compute the fixed cost as follows:

The fixed cost represents the intercept on the graph

because it represents the costs that would be incurred at a
zero activity level given existing capacity "if the
relationship plotted is valid from the data points back to
 42
ILLUSTRATIVE PROBLEM 1.
PREDICTORS, INC.
Data for the past 10 months were collected for Predictors, Inc. to
estimate the variable and fixed manufacturing overhead.

DETERMINE THE FF. USING HIGH-LOW METHOD:

➢ VARIABLE COST RATE PER HOUR
➢ FIXED COST PORTION
43
REGRESSION
ANALYSIS METHOD
1. The Least-squares Regression
Method
2. Scattergraph Or Visual Fit
Method
 45

REGRESSION ANALYSIS
METHOD
• Uses all available data to estimate the cost
function.
• It is a statistical method that measures the
average amount of change in the dependent
variable (costs) that is associated with a unit
change of one or more independent variables
(cost drivers such as number of units
produced, machine hours, etc.).
 46

SIMPLE REGRESSION
ANALYSIS
• Estimates the relationship between the
dependent variable and one independent
variable
• Y = Total cost (dependent variable)
• a = Fixed cost
• b = Variable cost per unit
• x = Activity level (independent variable, e.g.,
units produced)
 47

ACTIVITY TIME !!
A coffee shop owner wants to estimate the monthly
electricity cost based on the number of cups of coffee
sold. After analyzing past data, the owner determines
that 1,200 is the fixed electricity cost, and 0.50 is the
variable cost per cup of coffee. If the coffee shop sells
3,000 cups of coffee in a month, what is the estimated
total electricity cost using simple regression analysis?
 48

ACTIVITY TIME !!
Y = a + bX

Fixed electricity cost (a) = 1,200

Variable cost per cup (b) = 0.50
Cups of coffee sold (X) = 3,000

Y = 1,200 + (0.50 × 3,000)

Y = 1,200 + (1,500)
Y = 2,700
estimated monthly electricity cost based on the number of cups of coffee
 49

MULTIPLE REGRESSION
ANALYSIS
• estimates the relationship between the
dependent variable and multiple independent
variables.
• is used when the dependent variable (i.e, cost)
is caused by more than one factor.
• although adding more factors or variables
makes the computation more complex, the
principles involved are the same as in the
simple regression analysis.
50
EXAMPLE
51

A manufacturing company wants to estimate its monthly

maintenance cost (Y) based on two factors:
o Machine hours used (x₁)
o Number of units produced (x₂)

After analyzing past data, the company derives the following

multiple linear regression equation:
 52

ACTIVITY TIME !!
If the company operates 400 machine hours
and produces 1,500 units in a month, the
estimated maintenance cost is?
 53

We will use the multiple linear regression

formula:

Y = 5, 000 + (10 × 400) + (2 × 1, 500)

Y = 5, 000 + (4, 000) + (3, 000)
Where:
Y = 12, 000
Y = Estimated maintenance cost
A = Fixed cost (5,000)
B_1 = Variable cost per machine hour (10)
The estimated monthly maintenance
X_1 = Machine hours used (400)
cost is 12,000.
B_2 = Variable cost per unit produced (2)
X_2 = Number of units produced (1,500)
 54

THE LEAST-SQUARES
REGRESSION METHOD
• a statistical technique which is often used in
separating mixed costs into their fixed and
variable components.
 55

The two liner equation that are used to solve for a and b are:
 56
ILLUSTRATIVE PROBLEM 1.
PREDICTORS, INC.
Data for the past 10 months were collected for Predictors, Inc. to estimate
the variable and fixed manufacturing overhead.

DETERMINE THE FF. USING LEAST SQUARES

REGRESSION METHOD
➢ VARIABLE COST RATE PER HOUR
➢ FIXED COST
57
58
59
 60

SCATTER GRAPH OR VISUAL FIT

• Is a rough method for cost estimation by plotting costs
against past activity levels.
• Activity levels are called predictors (X) or independent
variables, or the right-hand-side of a regression
equation.
• Costs to be estimated are dependent variables (Y), or
the left-hand-side of the regression equation.
• The line is drawn by visual judgment so that the
distances of the observation above the line are equal to
the distances of the observations below the line. This
regression line represents the trend of expected values
based on the data.
The steps involved in the use of Scattergraph are as 61

follows:
1. On a graph, plot actual costs (on vertical axis)
during the period under study against the volume
levels (on horizontal axis).
2. The line of best fit is then drawn by visual
inspection of the plotted points, the line
representing the trend shown by the majority of
the points.
3. The fixed cost is estimated by extending the left
end of the line to the vertical axis.
4. The variable cost rate or slope of the cost line is
determined by dividing the difference between any
two level of activities by the difference in costs
corresponding to the same level of activities.
 62
ILLUSTRATIVE PROBLEM 1.
PREDICTORS, INC.
Data for the past 10 months were collected for Predictors, Inc. to estimate
the variable and fixed manufacturing overhead.

DETERMINE THE FF. UNDER SCATTERGRAPH

METHOD:
➢ VARIABLE COST RATE PER HOUR
➢ FIXED COST
63
 64

Fixed cost (a) is P30 which is

where the line of regression
begins.
 RELATIONSHIP

INDEPENDENT VARIABLE DEPENDENT VARIABLE

(X) (Y)

COST-DRIVER COST
(FACTORS/ACTIVITY LEVEL) (RESULTS)

CAUSE EFFECT
 CORRELATION ANALYSIS 66

• In the process of estimating and controlling costs, management

must evaluate whether or not the factor selected for estimating
cost behavior is suitable for that purpose.
• Cost may or may not react with changes in the factor selected
for cost analysis.
• The degree of correlation between the level of activity and costs
may be measured by the "coefficient of determination", most
frequently designated as r2.

To compute for this, the equation is:

 67

• If r2 expressed as a percentage will be relatively high, the correlation

is good. It means that the costs follow the factor selected.
The coefficient of determination (r²) ranges from 0 to 1, representing the 68
strength of the relationship between an independent variable (e.g., activity
level) and a dependent variable (e.g., cost). Here’s how to interpret r² values:

r² = 0 No correlation The independent variable does not explain any

variation in the dependent variable.
0 < r² < 0.3 Weak correlation The independent variable explains very little of
the variation in the dependent variable.
0.3 ≤ r² < 0.6 Moderate There is some explanatory power, but other
correlation factors also significantly influence the
dependent variable.
0.6 ≤ r² < 0.9 Strong correlation The independent variable explains most of the
variation in the dependent variable.
r² ≈ 1 Very strong Nearly all variation in the dependent variable is
correlation explained by the independent variable.
ILLUSTRATIVE Using the data, evaluate the degree of correlation
between the direct labor hours and supplies cost
PROBLEM 1 by solving for r2 or coefficient of determination.

Month Direct Labor Hours (X) Supplies Cost (Y)

January 20 P50
February 40 110
March 60 150
April 20 70
May 30 80
June 40 100
July 50 150
August 10 60
September 30 110
October 50 120

PREDICTORS, INC.
 70
COMPUTATION OF ESTIMATED CONDITIONAL STANDARD DEVIATION
FROM THE LINE OF REGRESSION

Hours Actual Cost (y) Average Cost Deviations Deviations

(ȳ) (y-ȳ) Squared
(y-ȳ)²
20 P 50
40 110
60 150
20 70
30 80
40 100
50 150
10 60
30 110
50 120
 71

To get each average cost,

Average Cost = [FC + (VC/U x No. of hours)]

= [P28.60 + (P2.04 x 20 hours)]
= [P28.60 + P40.80]
= P69.40
 72
COMPUTATION OF ESTIMATED CONDITIONAL STANDARD
DEVIATION FROM THE LINE OF REGRESSION
Hours Actual Cost (y) Average Cost Deviations Deviations
(ȳ) (y-ȳ) Squared
(y-ȳ)²
20 P 50 P 69.40 (19.40) 376.36
40 110 110.20 (0.20) 0.04
60 150 151.00 (1.00) 1.00
20 70 69.40 0.60 0.36
30 80 39.80 (9.80) 96.04
40 100 110.20 (10.20) 104.04
50 150 130.60 19.40 376.36
10 60 49.00 11.00 121.00
30 110 89.80 20.20 408.04
50 120 130.60 (10.60) 112.36
= 350 = P 1,000 = P 950 =0 = P 1,595.60
ESTIMATED CONDITIONAL 73

STANDARD DEVIATION

a = √ 1,595.60 / 10 - 2
a = √ 199.45
a = P 14.12
 COMPUTATION OF STANDARD DEVIATION 74

MEASURED FROM AVERAGE OF ALL DATA

Actual Cost (y) Average Cost (ȳ) Deviations Deviations
(y-ȳ) Squared
(y-ȳ)²
P 50
110
150
70
80
100
150
60
110
120
= P 1,000
 75

To get the average cost of all data,

Average Cost = total actual cost / n

= P 1,000 / 10
= P 100
 COMPUTATION OF STANDARD DEVIATION 76

MEASURED FROM AVERAGE OF ALL DATA

Actual Cost (y) Average Cost (ȳ) Deviations Deviations
(y-ȳ) Squared
(y-ȳ)²
P 50 100 (50) 2,500
110 100 10 100
150 100 50 2,500
70 100 (30) 900
80 100 (20) 400
100 100 0 0
150 100 50 2,500
60 100 (40) 1,600
110 100 10 100
120 100 20 400
= P 1,000 = 11,000
 77

STANDARD DEVIATION

b = √ 11,000 / 10
b = √ 1,100
b = P 33.17
CONCLUSION: There is apparently a very high degree of correlation
between hours of operation and supplies cost.
 CAUSE-AND-EFFECT RELATIONSHIPS 79

The most important issue in estimating a cost function (behavior) is to determine whether
a cause-and-effect relationship exists between the cost-driver (X) and the resulting costs (Y).

The cause-and-effect relationship might arise in several ways:

1. A physical relationship 2. Cause-and-effect then 3. Logic and knowledge of

exists between costs and arise from a contractual operations can establish
the cost driver. agreement. cause-and-effect.
Example: To produce more Example: Under the Example: When the number of
units of product requires more metered system, the component parts is used as a cost
materials which results in number of phone-minutes driver of design costs, a complex
higher material costs. used is the cost driver of the product design with many
telephone line costs. component parts will incur
higher design costs than a simple
product with few component
parts.
 80

CONCLUSION
• A high correlation or connection between two- • A vital aspect of cost
variables may not mean that either variable estimation is establishing
causes the other. A high correlation between two economic plausibility. Only
variables, X and Y, may not necessarily imply a true cause-and-effect
cause-and-effect but may merely indicate that the relationship not merely
two variables move together. It is possible that X correlation establishes an
may cause Y; X and Y may interact; both may be economically plausible
affected by a third variable Z or a correlation may relationship between costs
be due to chance. No conclusions about cause- and their cost drivers.
and-effect may be warranted by high correlations. Economic plausibility gives
For example, higher materials costs and higher the analyst confidence that
labor costs are caused by higher production. the estimated relationship
Materials costs and labor costs are highly will repeatedly appear in
correlated but neither causes the other. other similar sets of data.
THANK
YOU!