Most costs are a mixture of variable and fixed costs. Cost behavior determines how much a cost will change in relation to the unit volume of production or selling activity of a business.
Financial projections require cost forecasts to be made based on key cost drivers. Most costs are mixed in that they contain both a variable and a fixed cost component. Excel linear regression analysis can be used to identify both of these components based on past data to enable a cost forecast equation to be developed.
To simplify the process of expense forecasting there are various techniques which can be employed to link each type of expense to other variables (cost drivers), such as revenue or headcount, which have already been forecast in the financial projections. Of course there will always be expenses which are fixed in nature, which cannot be linked to other variables and need to be estimated in absolute monetary terms.