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Part 2

Costs and Decision
Making

Chapter 5

Cost Behavior and Relevant Costs

Chapter 6

Cost-Volume-Profit Analysis and Variable Costing

Chapter 7

Short-Term Tactical Decision Making

Chapter 8

Long-Term (Capital Investment) Decisions

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Chapter 5

Cost Behavior and
Relevant Costs

Chapter 5

U

141

Cost Behavior and Relevant Costs

nderstanding the behavior of costs is of vital importance to managers. Understanding how costs behave, whether costs are relevant to specific decisions, and how costs are affected by income taxes allows managers to determine the impact of changing costs and other factors on a variety of decisions. This chapter introduces concepts and tools that will be used in Chapters 6 through 8. Chapter 5 begins with a definition of cost behavior and illustrates the concepts of fixed costs, variable costs, and mixed costs. Next, the chapter revisits the concept of relevant costs (introduced in Chapter 1) as it applies to variable and fixed costs. The chapter also describes the impact of income taxes on costs.

Learning
Objectives
After studying the material in this chapter, you should be able to:

1

Describe the nature and behavior of fixed, variable, and mixed costs
Analyze mixed costs using regression analysis and the high/low method 2

Distinguish between relevant and irrelevant costs and apply the concept to decision making

3

Illustrate the impact of income taxes on costs and decision making

4

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Part 2

Costs and Decision Making

Introduction
KEY
CONCEPT
Costs behave in predictable ways.

In Part I, we defined and determined the cost of a product or a service. We now focus our attention on the nature of those costs and how they are used in decision making. As production volume changes, some costs may increase or decrease and