Post on 01-Jul-2020
Actual Cost
Opportunity Cost
Fixed Cost
Variable Cost
Accounting Cost
Economic Cost
Explicit Cost
Implicit Cost
Total Cost
Average Cost
Marginal Cost
Incremental Cost
Historical Cost
Replacement Cost
Short-Run Cost
Long-Run Cost
Cost concepts
“Actual Financial Expenditure of Firm.”
Cost that are actually incurred in acquiring or
producing goods and services are known as actual
costs.
generally recorded in account books, they are also
called acquisition or accounting costs.”
Example: Rent, Wages, cost of Raw material etc…
Actual Cost or outlay cost
Opportunity Cost or Alternative Cost
The opportunity cost represents sacrificed alternatives.
Measured in terms of profits from next best alternatives that
are foregone by the firm by using available resources.
- E.g. Consider a firm that has Rs 100. With this amount it
can either make a fixed deposit with a bank and earn an
interest of 10% p.a. or purchase the factors of
production for producing t-shirts. Let the cost of land,
labor capital and management be Rs. 20,35,30,15
respectively.
It is not recorded in the books of accounts.
Fixed Cost & Variable Cost FIXED COST:
They are defined as the cost
that remain constant with
any level of the output.
They might Exist even if no
output is produce.
Ex: Rent, administrative
expenses.
VARIABLE COST:
costs that vary with the
changes in the output are
known as variable costs.
E.g. Costs of Raw material,
wages.
Accounting CostCosts that are recorded in the books of accounts
and are used for accounting, auditing and
financial control are known as Accounting Cost.
Economic CostCosts that help in managerial decision making
for achieving the economic objectives of the
Firm are called Economic Cost.
Explicit Cost
They are out of pocket costs for which a cash payment is made to buy or hire productive resources.
The payment of raw material, utilities, wages etc.
Implicit CostsCosts that don’t involves the cash outlay.
Also called as book cost.
Ex: entrepreneur may use his own land for production for which no rent is to be paid.
I
Depreciation and salary of owner, etc.
Since implicit cost do not involve cash payment, they are often ignored by firms, especially smaller ones.
The sum total of all
the costs: Fixed,
Variable, explicit
and implicit for the
entire output is
known as Total
costs.
Total Costs
Average CostsIt is the cost per unit of output and its computed by dividing the total cost by the number of units produced.
ATC (Average Total Cost) = Total Cost /
quantity = TC/Q
AVC (Average Variable Cost) = Variable cost
/ Quantity = TVC/Q
AFC (Average Fixed Cost) = Fixed cost /
Quantity= TFC/Q
Marginal Cost
It is the change in total costs
due to the production of one
additional unit of output.
E.g., Let the cost of producing
10 units be Rs. 5000 and that
for 11 units be Rs.5050
in this case the average cost of
each unit is Rs.500 and the
Marginal cost of producing the
11th unit is Rs.50.
Because the short
run Marginal cost
curve is sloped like
this, mathematically
the average cost
curve will be U
shaped. Initially
average costs fall.
But, when marginal
cost is above the
average cost, then
average cost starts to
Incremental CostIt is the change in total cost due to the production of additional output.
Replacement Cost
It is the current cost of purchasing that assets now. Depending upon the nature of the commodity or assets, the replacement cost will be more than or less than the Historical cost.
E.g., A Machine costing Rs. 2,00,000 was purchased 5 years ago. Over time it has depreciated @10% p.a. It is presently worth Rs.1,18,000.Here Rs.2,00,000 is Historical Cost and Rs. 1,18,000 is its Replacement Cost.
HISTORICAL COST
It is the original price of plant and
materials paid by the firm.
For example, price of a machine at the time of
purchase in 1990 was 10,000 Rs and currently it
costs 15000 Rs.
Historical cost is – 10,000 Rs
Replacement Cost is – 15.000 Rs
Short-Run Cost
It is the cost that varies with output when plants
and equipments remains the same.
LONG-RUN COST
It is the cost that varies with output
when all the factor inputs change.
Sunk Cost