Question

Why is presenting all costs of an organization as a function of a single independent variable, although useful in obtaining a general understanding of cost behavior, often not accurate enough to make specific decisions concerning products, services or activities?

Answer 1

On presenting a cost to an organisation about it's products, services and activities, it might not very accurate to the actual reality. The main characteristics of cost determination is forecasting or estimation on the basis of profit maximization objective or the actual cost of production. There are many determinants of cost which forms the basis for the change in amount. If eventually the cost allocated is more than the market demand, then automatically the demand will fall for that product or service as it might have a cheaper substitute. On contrary, if the cost estimated is less than the market is prevailing, then most probably they might capture the consumer but they might lose their profits intact.