Linear Regression Concepts Are Used in Business, Essay Example

Linear regression is an analytical technique used in statistical business practice as well as in other spheres. This method of analysis is mostly used in accounting, for purposes of cost management over a specific period of time, considering specific variables. This analysis technique is used more often due to being more superior to such techniques as ‘expected values’, ‘scatter graphs’, and the ‘high-low method’ when making cost projections. The linear regression method is also known as the least squares method, where the goal of the method is to build the lie of best fit. Therefore, the linear equation is as follows: y = a + b(x), and represents a relationship between a fixed cost (a) and a variable cost per unit (b) by considering the output or level of activity (x), represented in the total cost (y). One would assume that similar meaning and purpose is to correlation analysis, but the difference is that correlation analysis only provides a basis in assessing how strong the relationship is between activity levels and costs. However, linear regression analysis gives the opportunity of estimating values to possible future linear relationships. Correspondingly linear regression uses previous historical variables as inputs for future assumptions. Therefore, linear regression analysis is used by accountants as well as financial analysts to predict total costs relying on the actual accessible data. From here, such an analysis is particularly useful as a budgetary tool, it makes possible planning and decision-making processes which are oriented on statistical data. Therefore, when considering the peculiarities of this method of statistical analysis, this method makes it possible to identify specific causal factors that affect business demand, and their contribution. As an example of use of linear regression in business, other than the use for identifying product cost variables, it is broadly used in modeling the Marketing-Mix for the purpose of measuring the return on investments of marketing investments. The method is also used to factorize total sales into sales driven by various marketing and environmental drivers in a certain time period.