Understanding cost behavior is crucial for various participants of capital markets. Managers for example are engaged to manage costs efficiently since costs determine earnings, which in turn are often used to evaluate firms’ and managers’ performance. More specifically, in competitive markets where the prices are predetermined, managers can increase profitability by focusing on costs. Analysts, creditors, and investors for example make significant efforts to analyze and predict cost behavior since it is highly relevant in line with predicting sales in order to estimate future earnings more precisely. Further, corporate outsiders evaluate firms’ performance inter alia on management’s ability to efficiently control costs.
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