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Cost behavior refers to how costs change in relation to changes in a business’s level of activity or production volume. Understanding cost behavior is crucial for budgeting, forecasting, and decision-making. Costs are typically classified into three main categories: fixed costs, variable costs, and mixed costs.

Fixed costs remain constant regardless of production levels, such as rent or salaries. Variable costs change directly with the level of production, like materials and labor. Mixed costs contain both fixed and variable components, such as a utility bill that has a base charge plus charges for usage.

Analyzing cost behavior helps organizations identify how costs will react to changes in business activity and aids in making strategic decisions to improve profitability.