A cost function is a mathematical expression of how cost drivers affect a particular cost. However, an intuitive understanding of cost functions is just as important as being able to write the mathematical formula. Suppose you have been using a cost function to predict total order-processing activity costs.

The cost function is total costs = ₤25,000 + ₤89 × (number of orders processed). This formula is based on data that are in the range of 0–700 orders processed. Now, you want to predict the total cost for 680 orders. You have a few fundamental questions to answer before you are comfortable using the cost function in this situation. What does it mean when a cost function is linear? Why do managers want to know whether a cost is linear? What is the importance of the relevant range?