long run, properties of cost functions, and cost estimation. In the short run, costs of input factors such as rent, interest payment on debt, and depreciation on structure are fixed. Since these input factors have to be provided regardless of the quantity produced, the payments for these factors of production remain constant. As such, they are called fixed costs of production. In the long run, all inputs are variable meaning that all costs are variable. As a result, costs in the long run are treated more as a planning horizon than as an operating cost for an organization.
On the other hand, the basic idea behind cost estimation is to estimate the relationship between costs and the variables affecting these costs. This chapter has presented three of the most widely used cost estimation techniques, namely 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. The reasons for this is that (1) it utilizes all the available information in a data set, (2) the estimated parameters are more precise than those obtained by the other two methods, and (3) the estimated parameterd can be tested for their statistical significance. Perhaps the greatest advantage of the regression method is that once the parameters have been estimated, they can be tested for (statistical) siginificance. Not only that, they can be used to forecast the costs of providing services in the future.