What does linear regression analysis estimate in cost behavior?

What does linear regression analysis estimate in cost behavior?

• A. Only fixed cost
• B. Only variable cost per unit
• C. The line of best fit and estimates for fixed cost and variable cost per unit
• D. The average unit cost across activity levels.

Answer: (C)

Linear regression analyzes how total cost changes with different levels of activity and fits a straight line to those data points. The line is expressed as Cost = Fixed cost + (Variable cost per unit × Activity). The intercept on the cost axis is the estimate of fixed cost, and the slope is the estimate of the variable cost per unit. By choosing the line of best fit, regression uses all observed data to minimize the deviations, giving reliable estimates of both fixed cost and variable cost per unit. It doesn’t provide only fixed cost or only variable cost per unit, and it isn’t just the average unit cost across levels.

Linear regression analyzes how total cost changes with different levels of activity and fits a straight line to those data points. The line is expressed as Cost = Fixed cost + (Variable cost per unit × Activity). The intercept on the cost axis is the estimate of fixed cost, and the slope is the estimate of the variable cost per unit. By choosing the line of best fit, regression uses all observed data to minimize the deviations, giving reliable estimates of both fixed cost and variable cost per unit. It doesn’t provide only fixed cost or only variable cost per unit, and it isn’t just the average unit cost across levels.