Question

Why do you think the knowledge of cost behavior is important for managerial decision making? give an example to illustrate your answer

Answer 1

The knowledge of cost behavior is important for managerial decision making as, having a thorough knowledge about this enables the manager to predict whether any costs will decrease or increase as business activity changes.

For instance, if a production line is nearing capacity, the relevant cost behavior would be to expect a large cost increase (to pay for an equipment expansion) if incremental demand increased by a small amount. Understanding cost behavior is an essential component of cost-volume-profit analysis.

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