ABSTRACT
This chapter discusses three basic elements of cost behavior that are important to understanding the nature of costs and how they affect the functioning of an organization: time frame of costs, general properties of cost functions, and cost estimation. Of these, cost estimation is particularly important, as it provides the information necessary for determining the nature of current as well as future costs of an organization. A production function shows the relationship between input and output based on the state of technology. If technology remains constant in the short run, it is likely that the production function will also remain constant in the short run. The eventual rise in costs is due to diseconomies of scale, which occur once the level of operation becomes too large, making it difficult for the decision makers to efficiently coordinate all the activities of an organization.
