ABSTRACT
This chapter discusses three basic elements of cost behavior that are important for 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. The cost estimation is particularly important for determining the nature of current as well as future costs of an organization. The chapter discusses three of the most widely used cost estimation techniques: the graphical method, the high–low method, and the regression method. Of these, the regression method is considered more rigorous and analytically more sophisticated than either the graphical or the high–low method. All cost functions have one characteristic in common: they all contain two basic parameters – one representing the fixed cost and the other the variable cost. Although linear relationship is common in most cost studies, it is not uncommon to have a nonlinear relationship such as quadratic, cubic, or a higher degree polynomial.
