What does regression analysis help to determine in cost behavior?

Regression analysis is a statistical method used to examine the relationship between variables, specifically to identify trends and patterns within a dataset. In the context of cost behavior, regression analysis helps to determine the line that best fits the data points concerning costs incurred relative to some activity level, such as production volumes or sales.

By fitting a line to the historical cost data, regression analysis allows for the creation of a cost equation that can explain how costs change in relation to changes in activity levels. This equation typically separates costs into fixed and variable components, providing insights into how costs behave as production or sales levels fluctuate. The accuracy of this fitted line represents how well the model predicts costs based on the activity level, thus aiding businesses in forecasting and budgeting processes.

This function of regression analysis is crucial for businesses seeking to manage their costs effectively and make informed decisions based on reliable projections.