COST COMPUTATION Presented By: Karl Brian M. Joble
What is Cost? Anything incurred during the production of the good or service to get the output into the hands of the customer. An amount paid or required in payment for a purchase. Note Controlling costs is essential to Business Success. It is important to point out that production involves cost.
Cost Theory Offers an approach to understanding the costs of production that allows firms to determine the level of output that reaps the greatest level of profit at the least cost. – E-How.com
Contains various measures of costs. These include a firm's fixed costs and variable costs.
Aside from Monetary and Economic Resources also have Opportunity Cost. Opportunity cost is the opportunities forgone in the choice of one expenditure over others. – Answers.com
Cost Concept: Economic Costs Private vs. Social Cost Private – Are expenses shouldered by individual producers. Ex. Rent and Cost of Material Social – Additional Cost are involved that are not paid by the producers but are Bourne by the society. Ex. Cement for Highways Explicit vs. Implicit Cost Explicit – consist of actual payments made by the firms for resources bought or hired Implicit – Cost of Self owned or Self employed resources. Total Fixed vs. Total Variable Cost – Short-run Fixed – Resources whose quantity cannot be readily be changed for short run. (Salaries, Rent, Insurance, Maintenance) Variable – Can be readily changed when output is increased in short run. (Wages of Laborers, Cost of Raw Materials and Transportation)
Short-run Cost Schedule
Marginal costs(MC) – The cost of producing an extra unit of output. MC = Change in TC / Change in Q Total Cost (TC) – Composed of total Fixed Cost and Total variable Cost. TC = FC + VC Average Fixed Cost (AFC) – Decreases continuously as output increases. The Greater Output the Smaller the AFC. Due to fixed cost that is spread to more output levels. AFC = FC/Q Average Variable Cost (AVC) – Refers to the variable costs per unit of output produced by the firms. AVC = VC/Q Average Cost (AC) – Obtained by Dividing TC by Level of Output, it also obtained by adding the sum of AFC and AVC. AC = TC/Q or AC = AFC + AVC
SUMMARY Economic costs are incurred in producing output. These Cost can be private or social, explicit or implicit, fixed or variable. In the short-run, firms pays both fixed and variable costs. Thus, total cost is the sum of total fixed cost and total variable cost. Fixed costs are part of the total cost and do not depend on output. Variable cost are dependent on the output. When AC and AVC are falling, MC is below them. When AC and AVC are rising, MC is above them.
MC and AC intersect at the minimum point of AC. MC and AVC intersect at the minimum point of AVC. The average FC keeps falling as output is increased As output rises, the share of FC in average costs becomes smaller and negligible REFERENCE:
Macarubbo, Josefina (2005) “Basic Economics”. Quezon City Phil: New
Sicat, Gerardo. Costs, Supply, and the Firm. Economics.