CIMA Fundamentals Of Management Accounting (BA2) Practice Exam

What does linear regression analysis provide in cost modeling?

It uses only two data points to determine costs. It finds the line of best fit using mathematical methods to estimate fixed cost and variable cost per unit. It assumes there is no fixed cost. It ignores any relationship between cost and output.

Correct Answer:

It finds the line of best fit using mathematical methods to estimate fixed cost and variable cost per unit.

Explanation:

In cost modeling, linear regression is used to describe how total cost changes as output changes. It finds the line that best fits the observed data points by minimizing the differences between actual costs and the costs predicted by the line (the least-squares approach). The line has the form Cost = FixedCost + VariableCostPerUnit × Output. The intercept estimates the fixed costs, and the slope estimates the variable cost per unit. This relies on multiple data points across different output levels, not just two, and it explicitly models the relationship between cost and activity. It also allows you to assess how strong that relationship is.

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