Cost behavior refers to how costs change in relation to changes in business activity levels. It helps businesses understand how costs will react to fluctuations in production or sales volume. Costs are typically categorized as fixed, variable, or mixed. Fixed costs remain constant regardless of activity level, while variable costs change directly with production volume. Mixed costs contain both fixed and variable components. Understanding these behaviors aids in budgeting, forecasting, and decision-making, allowing businesses to manage expenses effectively and optimize profitability.