Question

Describe three different ways in which managers determine cost behavior, which do you think is most accurate? How can you visualize cost behavior and why is this important?

Answer 1

Cost behaviour means change in cost at different levels of production. It's refers to different types of production cost. There are many types of cost according to their behaviour,but main are-----

1. Fixed costs----- These are those costs Which do not change with production activity within a relevant level. These will charged even there is no production activity. Example-- Depreciation,rent expenses etc.

2.Variable costs----- These are those costs Which changes according to production activity. When more unit are produce it increases and decreases when less units are produce. Example---- Electricity bill expenses,machine repairs expenses etc.

3.Mixed costs---- These are also called semi-veriable costs because it have characterstics of both fixed and variable costs. Example--- Machine has its fixed cost like depreciation,but it has variable cost also like fuel . Machine does work or not but depreciation is charged but it needs fuel when we work on it.

It is very difficult to assume the accurate cost, but if we analyse and gathered information about it , these are more accurate cost. In cost management budgets and estimates are prepared on analysis basis information which could be more reliable.

Control and management of These costs are Very difficult because of cost behaviour. We need accurate planning,control techniques to correctly allocated These costs. We need to make analysis and estimation to control cost according to their behaviour.

Determine costs according to nature or behaviour is very important. It helps business to take many decisions---

* Buy or produce decision

* In calculating Break even point.

* Continuity of production.

* Shutdown of production.

* Profitability of production.

and many types of daily routine decisions. Thus we can say that knowledge of business cost behaviour helps in planning, controlling, analysing and forecasting.