Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

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9.3
A linear cost function is a cost function, where within the relevant range, the graph of total costs versus a single cost driver forms a straight line. An example of a linear cost function is a cost function for use of a telephone line, where the terms of use area fixed charge of €10,000 per year plus a €2 per minute charge for phone use. Ab nonlinear
cost function
is a cost function, where within the relevant range, the graph of total costs versus a single cost driver does not form a straight line. Examples include economies of scale in advertising, where an agency can double the number of advertisements for less than twice the cost, step-function costs and learning-curve-based costs.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
9.4
No. High correlation merely indicates that the two variables move together in the data examined. It is essential also to consider economic plausibility before making inferences about cause and effect. Without any economic plausibility fora relationship, it is less likely that a high level of correlation observed in one set of data will be similarly found in other sets of data.

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