We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

How Do I Make a Cost Function Estimation?

Malcolm Tatum
By
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Cost functions have to do with the total cost involved in a venture, allowing for both fixed costs as well as variable costs related to the anticipated output quantity of a production process. While a cost function can be determined using historical data, it is also possible to develop a cost function estimation on the front end of a venture, using available data to project what the ultimate cost function will be. There are a few different ways to go about arriving at a cost function estimation, with each one providing a logical approach that will work for various situations.

With any type of cost function estimation, the first step is to gather relevant data. This means identifying every fixed cost associated with the project, as well as arriving at a logical amount for each variable cost involved. From there, identifying the quantity of production that is achieved at those levels of expense can make it possible to come up with a cost function estimate for a future period.

One approach to cost function estimation is known as the engineering approach. Here, the idea is to base the estimation on historical data, making certain allowances for changes in the variable costs. Typically, this approach focuses on data accumulated from within the organization and may or may not allow a great deal of information about the economy in general to influence the results.

A cost function estimation may also be conducted using a method known as the survivorship approach. This process involves the inclusion of data relevant to not only the history of the company, but also the industry in which that company functions. With this approach, attention is given to the strength of the firms participating in the industry, how long they’ve been in business, and who has and has not experienced growth over a specific period of time. This approach allows the company to identify with what is happening with companies of similar size and structure with similar levels of revenue generation, and come up with a workable estimate of what is likely to happen in the future.

A cost function estimation may also be developed using a statistical approach. Here, the emphasis is on reviewing historical data as it relates to a series of defined time periods, and may include information collected from one or more firms as the means of arriving at future costs for both fixed and variable expenses. The approach relies on using the collected data in a way that makes certain assumptions, such as whether production will remain the same for the upcoming period under consideration, or if there will be some shift upward or downward in order to meet emerging changes in consumer demand.

The activity of cost function estimation is helpful for any type of business operation. Even small companies will operate with a series of fixed and variable costs related to their output, and must project how those costs will related to production in the future. While this type of estimation is only a projection, responsibly assessing the available data can help owners and others to arrive at an estimate that is highly likely to be very close to the actual costs that are eventually incurred.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.