2. Introduction
In managerial economics, cost is normally
considered from the producer’s or firm’s point of
view. In producing a commodity or service, a
firm has to employ an aggregate of various
factors of production such as land, labour,
capital and entrepreneurship. These factors are
to be compensated by the firm for there efforts
or contribution made in producing the
commodity. Thus the cost of production of a
commodity is the aggregate of price paid for the
factors of production used in producing the
commodity.
3. Cost Concepts
Real Cost:
The term “real cost of production” refers to
the physical quantities of various factors used in
producing a commodity.
4. Opportunity Cost Or Alternative Cost.
Since the real production cost cannot be
measured in a absolute sense, the concept of
opportunity cost is evolved to measure it in aq
objective sense. The concept of opportunity cost
is based on the scarcity and versatility
characteristics of productive resources. It is the
most fundamental concept in economics.
5. Importance of the concept of opportunity cost:
1 Determination of Relative Price of Goods.
2 Determination of Normal Remuneration to a
Factor.
3 Decision Making and Efficient Resource
Allocation.
6. Money Cost.
Cost of production measured in terms of money
is called the money cost.
“Money Cost” is the monetary expenditure on
inputs of various kinds- raw materials, labours,
etc., required for the output. It is the money
spent on purchasing the different units of factors
of production needs for producing a commodity.
Money cost os oviously the payment made for
the factors in terms of money. Money cost is the
outlay cost, i.e., the actual financial expenditure
of the firm.
7. Explicit and Implicit Costs.
Explicit costs refer to the actual money
outlay or out of pocket expenditure of the firm
to but or hire the productive resources it needs
in the process of production. It is referred to as
out-of-pocket costs for example. Cost of raw
materials; wages and salaries; power charges;
rent of business or factory premises; interest
payments of factory premises. Etc.
8. Implicit Cost.
Implicit cost is not directly incurred by the
firm through market transaction. But
nevertheless are to be reckoned in the
measurement of total money costs of
production. These are to be imputed or
estimated on the bases of opportunity cost, i.e.,
from what the factors by the firm itself could
earn in their next best alternative employment.
9. Accounting And Economic Costs
An economist’s idea of cost of production differs
from that of an accountant. In economics the cost
of production consists of all the factors that are
involved in producing a particular commodity for
example wages for the labors, raw materials,
normal profit to the entrepreneur, but an
accountant considers the explicit cost i.e the cash
payment to the factors of production, maid by the
entrepreneur, for the service rendered dy these
factors in the productive process for example:
wages, interest, rent payment but not the profit
maid by the entrepreneur
10. Fixed And Variable Costs
Fixed cost
Fixed costs are the amount spent by the firm
on fixed inputs in the short ryn. Fixed costs are,
thus, those costs which remain constant,
irrespective of the level of output. These costs
remain unchanged even if the output is nil. Fixed
costs, therefore, are known as “supplementary
costs” or “overhead costs.”
11. Some of the fixed costs are:
Payments of rent for building.
Interest paid on capital.
Depreciation and maintenance allowances.
Administrative expenses.
12. Variable Costs or Prime Costs
Variable costs are those costs that are
incurred on various factors. These factors vary
directly with the level of output. In other words,
variable costs are those costs which rise when
output expands and fall when output contracts.
When output is nil, they are reduced to zero.
The variable cost include:
Price of raw materials,
Wages of labour,
Fuel and petrol charge,
Excise duties, sales tax.
