PROJECT ON COSTS

SANKET JAGARESNEHAL BHISEBRIJESH GUPTAPOOJA BISTSUMEET POKHARE

It refers to any expenditure incurred by a firm or an individual.

Profit maximization & cost minimization is main objective of the firm.

“Cost” concept helps in choosing the alternative which satisfies the above condition.

SUNK COST IMPLICIT COSTEXPLICIT COSTLONG-RUN COSTOPPURTINITY COST.

In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.

Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken.

Both retrospective and prospective costs may be either fixed (that is, they are not dependent on the volume of economic activity, however measured) or variable (dependent on volume).

From a firm point of view, sunk costs arise when an investment in an asset cannot be recovered by subsequent resale.

Once incurred, sunk costs are not part of the firm’s alternatives because they cannot be put to alternative use.

Therefore, an investment is a sunk cost when its opportunity cost is zero.

The Sunk Cost Fallacy:

Once one has made a significant non-recoverable investment, there is a psychological tendency to invest more even when the return on the subsequent investment isn’t worthwhile.

Watching a movie to the end, after you are convinced that it stinks, would be another example.

Many people have strong misgivings about "wasting" resources. This is called "loss aversion".

In the above example involving a non-refundable movie ticket, many people, for example, would feel obliged to go to the movie despite not really wanting to, because doing otherwise would be wasting the ticket price; they feel they passed the point of no return. This is sometimes called the sunk cost fallacy.

The popular phrase associated with the sunk cost fallacy is ‘throwing good money after bad’.

The fallacy of sunk costs arises because of a psychological tendency to try to make an investment pay off when something happens to render it obsolete.

Sunk Costs should be avoided while calculating costs. They are irrelevant for decision-making.

The nature of cost-whether it is sunk or avoidable is important.

From a prospective viewpoint managers should be very careful before committing to costs that will become sunk, since such commitments cannot be reversed.

ALSO CALLED AS “IMPLIED COST”. RESULTS FROM USING ASSET INSTEAD OF

RENTING , SELLING OR LENDING. ALSO IMPLIES TO FORGONE INCOME FROM

CHOOSING NOT TO WORK REPRESENTED BY LOST OPPURTUNITY IN USE OF

COMPANY’S OWN RESOURCES EXCLUDING CASH. INTANGIBLE COST NOT ACCOUNTED.

THE TIME AND EFFORT THAT THE OWNER PUTS IN MAINTAINING COMPANY RATHER THAN EXPANSION

A direct expense that a business incurs in conducting an activity. E.g salaries, wages, materials, etc.

An explicit cost is an easily accounted cost, such as wage, rent and materials.

Explicit cost are those which the entrepreneur has to pay from his own pocket.

ABC CO. IS INTO TEXTILES BUSINESS. IT PAYS A RENT OF Rs.1000 MONTHLY , WAGES OF Rs.2000, ELECTRICITY EXPENSES OF Rs. 300.THUS ITS EXPLICIT COST IS 1000+2000+300 = 3300

Long run refers to a time period during which full adjustment to a change in environment can be made by the firm by varying all inputs, including capital equipment and factory building.

Cost incurred during this period is long run cost. It includes all the expenses incurred while bringing

about a change in all the mentioned inputs.

ENVELOPE OF AN INFINITE NUMBER OF SHORT-RUN AVERAGE COST CURVE.

U SHAPEDPLANNING CURVE

REFERS TO THE VALUE OF THE NEXT BEST ALTERNATIVE FORGONE IN MONETARY TERMS.

IT ALSO REFERS TO IGNORING THE NEXT BEST ALTERNATIVE.

A PERSON INTO GARMENT BUSINESS DECIDES TO EXPORT GARMENTS AT Rs. 200 PER PIECE RATHER THAN SELLING IT DOMESTICALLY AT Rs. 300.THUS Rs.300 IS HIS OPPURTUNITY COST WHICH HE HAS FORGONE FOR THE SAKE OF EXPORTING HIS PRODUCT.

HIDDEN COSTSACCOUNTING COSTS