Final answer:
The two methods of cost estimation are the high-low method and the least squares regression method. The high-low method involves calculating the variable cost per unit of activity using the highest and lowest levels of activity. The least squares regression method fits a line to the data points to determine both variable and fixed costs.
Step-by-step explanation:
The two methods of cost estimation are the high-low method and the least squares regression method. The high-low method involves taking the highest and lowest levels of activity and calculating the variable cost per unit of activity. This method is simple and quick, but it may not be accurate if there are outliers in the data. The least squares regression method uses statistical techniques to fit a line to the data points, determining both the slope (variable cost per unit of activity) and the intercept (fixed cost). This method requires more calculations but provides a more accurate estimation of costs.
The advantages of the high-low method are its simplicity and speed. It can be used when there is a limited amount of data and can provide a rough estimate of costs. However, the high-low method may not take into account outliers, which can skew the results.
The advantages of the least squares regression method are its accuracy and ability to account for outliers. By fitting a line to the data, it considers the relationship between activity levels and costs in a more comprehensive way. However, this method requires more calculations and the use of statistical software.