Final answer:
Cost behaviour analysis focuses on how costs react to changes in the level of activity, particularly looking at how fixed and variable costs behave, which helps businesses with short-term cost analysis and decision-making for profit maximization.
Step-by-step explanation:
Cost behaviour analysis reacts to changes in the level of activity and is critical for businesses to understand for informed decision-making. The primary focus is on how fixed costs and variable costs change with different levels of production or sales activity. For instance, knowing that fixed costs stay the same regardless of production levels, while variable costs change in direct proportion, helps businesses analyze short-run costs in terms of total cost, fixed cost, variable cost, marginal cost, and average cost. Furthermore, firms use this information, along with revenue analysis, to calculate average profit and evaluate patterns of costs to determine potential profit. Long-run production analysis differs slightly, as it considers the firm's cost structure over a longer period, potentially leading to different strategic decisions based on the evaluation patterns of costs and the market structure.