2. The situation
Hobsons, a publishing business, was established in 1974 as a part of the Daily Mail and General Trust
(DMGT), one of the oldest and most successful international media organisations. Hobsons is a leading
provider of innovative technology and integrated marketing solutions to empower education
professionals, including recruitment, enrolment, and retention. Hobsons has developed a gamut of
products that assist educational institutions to plan, manage and track students more effectively.
Hobsons software products include inquiry management software, customer relationship management,
group messaging technology, and online application systems.
Hobsons was aware the profitability of its business was directly dependent on the cost of developing,
maintaining, and sustaining its main business applications that provide services to external parties,
such as students, teachers, and other education professionals.
Therefore, Hobsons required assistance in determining the right approach, methodology, and process
of cost estimation in order to ensure the accuracy and relevance of the results. With the help of
financial consultants, the Fujitsu TCO, Hobnobs was able to decide the baseline cost of its applications
and compute the cost per transaction. This provided Hobsons with the facility to manage its costs more
effectively and plan for constant improvement.
3. Cost is the expenditure, measured in monetary terms, incurred or to be incurred in order to achieve
a specific objective.
Cost is an important factor in business analysis and decision making especially pertaining to the
following aspects:
• Identifying the weak points in production management
• Minimising the cost of production
• Finding the optimum level of production
• Estimating the cost of business operations
• Determining the price margins for selling the goods produced
4. Cost
Inputs multiplied by their respective prices are combined together to obtain the money value of
inputs (cost of production).
EXPLICIT COSTS
Explicit costs also referred to as actual costs, include those payments that the employer makes to
purchase or own the factors of production.
IMPLICIT COSTS
Unlike explicit costs, there are certain other costs that cannot be reported as cash outlays in
accounting books. These costs are referred to as implicit costs. Implicit costs are also referred to as
imputed costs, implied costs, or notional costs.
5. ACCOUNTING COSTS
Accounting costs include the financial expenditure incurred by a firm in acquiring inputs for the
production of a commodity. These expenditures include salaries/wages of labour, payment for the
purchase of raw materials and machinery, etc. Accounting costs are recorded in the books of
accounts of a firm and appear on the firm’s income statement.
ECONOMIC COSTS
Economic costs include the total cost of opting for one alternative over another. The economic costs
include the accounting cost (or explicit cost) as well as the opportunity cost (or implicit cost)
incurred to carry out production.
6. Opportunity Cost
Opportunity cost may be defined as the return from the second-best use of the firm’s limited
resources, which it forgoes in order to benefit from the best use of these resources.
7. FIXED COSTS
Fixed costs refer to the costs borne by a firm that does not change with changes in the output level.
Even if the firm does not produce anything, its fixed costs would still remain the same. For example,
depreciation, administrative costs, rent of land and buildings, taxes, etc. are fixed costs of a firm that
remain unchanged even though the firm’s output changes. However, in long run, the fixed costs may
also vary.
VARIABLE COSTS
Variable costs refer to the costs that are directly dependent on the output level of the firm. In other
words, variable costs vary with the changes in the volume or level of output. For example, if an
organization increases its level of output, it would require more raw materials. The cost of raw
materials is a variable cost for the firm.
8. Short-Run Total Cost
The total cost refers to the actual cost that is incurred by an
organization to produce a given level of output. The short-
run Total Cost (TC) of an organisation consists of two main
elements:
Total Fixed Cost (TFC): These costs do not change with
the change in output. TFC remains constant even when the
output is zero. TFC is represented by a straight line
horizontal to the x-axis (output).
Total Variable Cost (TVC): These costs are directly
proportional to the output of a firm. This implies that when
the output increases, TVC also increases, and when the
output decreases, TVC decreases as well.
TC = TFC + TVC
9. Short-run Average Cost
The average cost is calculated by dividing the total cost by
the number of units a firm has produced. The short-run
Average Cost (AC) of a firm refers to the per-unit cost of
output at different levels of production.
𝑇𝐶
𝑄
=
𝑇𝐹𝐶 + 𝑇𝑉𝐶
𝑄
AC = AFC + AVC
AC curve of a firm is U-shaped. It declines in the
beginning, reaches to a minimum and starts to rise.
10. Short-run Marginal Cost
Short-run marginal cost refers to the change in short-run total cost due to a change in the firm’s
output.
𝑀𝐶 =
∆𝑇𝐶
∆𝑄
In the short-run,
𝑀𝐶 =
∆𝑇𝐶
∆𝑄
=
∆𝑇𝑉𝐶
∆𝑄
13. Revenue
Total Revenue
Revenue refers to the amount of money that a company earns through the sale of its goods or
services in a given time period. Organizations need to consider the amount of revenue generated by
them against the cost of production to assess the profitability of their businesses.
Total Revenue = Price x Quantity
TR = PxQ
Average Revenue
The average Revenue (AR) of a firm refers to the revenue earned per unit of output sold. It is
calculated by dividing the total revenue of the firm by the total number of units sold.
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐴𝑅 =
𝑇𝑅
𝑄
14. Marginal Revenue
The marginal Revenue (MR) of a firm refers to the revenue earned by selling an additional unit of
the commodity. In other words, the change in total revenue resulting from the sale of an additional
unit is called marginal revenue.
𝑴𝑹𝒏 = 𝑻𝑹𝒏 − 𝑻𝑹𝒏−𝟏
However, when change in units sold is more than one,
𝑀𝑅 =
∆𝑇𝑅
∆𝑄
15. Relation between TR and MR
• If MR is greater than zero, the sale of an
additional unit increases the TR.
• If MR is below zero, then the sale of an
additional unit decreases the TR.
• If MR is zero, then the sale of an additional
unit results in no change in the TR.
