Estimating Costs in an Uncertain Environment Many companies face increasingly unpredictable costs and revenues, as the recession affects demand for products and the costs of materials and labor for these products. Revenues and costs have fluctuated significantly in recent years for such cost elements as fuel, labor, commodities (agricultural commodities, metals, etc.), interest, and rent expense, among others. Dealing with the increased fluctuations requires cost estimation methods that are more sophisticated and more frequently updated. The result is that companies are including in their cost estimation additional variables and additional data for these variables. Moreover, these companies are updating their estimation models more frequently. For example, Southwest Airlines updates its revenue prediction model on a daily basis.
Required Consider Southwest Airlines and the following six key areas of cost for the company. Which of these costs do you think the airline must update most frequently, and why?
1. Labor costs
2. Fuel costs
3. Maintenance spending
4. Advertising spending
5. Airport rates and charges to the airline
6. Aircraft ownership costs
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