Answer :

Final answer:

The scatter diagram approach can approximate fixed costs, but it may not be the most precise method. Fixed costs remain constant regardless of changes in the level of production or services provided. Understanding different cost measures is essential for financial decision-making.

Explanation:

The scatter diagram approach does provide an approximation of measuring fixed costs, but it might be less accurate compared to more precise accounting methods. This is because a scatter diagram visually represents the relationship between cost and activity levels, which can be subject to interpretation and can potentially lead to inaccuracies. An accurate calculation of fixed costs often requires a thorough understanding of cost behavior patterns. For instance, if we consider a scatter diagram with a fixed cost of $50, it remains constant across different levels of production or service. As the figure from a hypothetical service shows, the fixed cost line runs parallel to the horizontal axis, unaffected by the quantity of service provided.

Moreover, lessons from alternative measures of costs indicate that breaking down total costs into fixed cost, marginal cost, average total cost, and average variable cost can provide valuable insights. These cost measures differ from one firm to another, but understanding them is crucial for making informed financial decisions.

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