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Linear regression

Linear regression estimates a straight-line relationship between a response variable and one or more explanatory variables. In simple cost estimation, y=a+bx represents estimated total cost, with intercept a and slope b. Least squares chooses the fitted line that minimises the sum of squared vertical residuals. The estimates describe the observed relationship under the model assumptions; they do not prove causation or ensure accurate forecasts after capacity, prices or processes change.

Worked example

A fitted model is estimated cost = $4,000+$6×machine hours. At 1,500 hours, predicted cost is $13,000. If the actual cost is $13,600, the residual is $600 above the fitted value, which requires interpretation rather than automatic attribution to inefficiency.

Common mistake

Assuming every regression intercept is a true unavoidable fixed cost or extrapolating beyond the relevant operating range.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA MA Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027