Here are the meanings of the components or symbols used in the least squares equation of y = a + bx:

y is the dependent variable, such as the estimated or expected total cost of electricity during a month. The amount of y is dependent upon the amounts of a and bx.

a is the estimated total amount of fixed electricity costs during the month. It is the value of y, when x is zero. If the total cost line intersects the y-axis at $1,000 then it is assumed that the total fixed costs for a month are $1,000.

b is the estimated variable cost per unit of x. It determines the slope of the total cost line. If b is $5, this means that the variable cost portion of electricity is estimated to be $5 for every unit of x.

x is the independent variable. For example, x could represent the known number of machine hours used in the month.

bx is the total variable cost of electricity. If the company’s electricity cost is estimated to be $5 per unit of x, and x is 4,000 machine hours, then the total variable cost of electricity for the month is estimated to be $20,000.

In our example the total estimated cost of electricity (y) in a month when x is 4,000 machine hours will be $21,000.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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