Note: All expenses are costs,but not all costs are expenses. Cost does not include the mark-up for profit.

1. Cost and Cost Types
Name - Yaksh Jethva
yakshjethva_123@yahoo.com

2. Various Cost Types
An amount has to be paid or given in order to get something is cost.But in
business cost is usually a monetary valuation of effort, material, resource,
time and utilities consumed, risk incurred and opportunity forgone in
production and delivery of a good or service.
● Opportunity Cost
● Money Cost and Real Cost
● Accounting Cost and Economic Cost
● Private Cost and Social Cost
● Fixed Cost, Variable Cost, Average Cost and Marginal Cost

3. Opportunity Cost
The resources of any firm operating in the market are limited and investment options are many.
The firm therefore has to decide or select only those investment opportunities/options which
provide the firm with the best return or best income on investment. This means that if a firm can
invest money/ resources only in one investment option then the firm will select that investment
option which promises best return on investment to the firm. In other words while doing so the
firm gives up/rejects the next best option for investing the funds.
This can also be understood by a simple example - Let us assume that an individual has two job
offers in hand. One job offer is promising him a salary of Rs. 30, 000 per month while the other
job offer will ensure salary of Rs. 25, 000 per month. If the job profile and other factors related
to the job offers are more or less same then it can be easily expected that the individual will
select the job offer which will provide him with higher salary that is salary of Rs. 30, 000 per
month. Thus, in this case, the opportunity cost is the return involved in the next best alternative
i.e; Salary of Rs. 25, 000 in the next best job offer.

4. Money Cost and Real Cost
Money Cost of production is the actual monetary expenditure made by company in the
production process. Money cost this includes all the business expenses which involve
outlay of money to support business operations.
For example the monetary expenditure on purchase of raw material, payment of wages
and salaries, payment of rent and other charges of business etc can be termed as Money
Cost.
Real Cost of production or business operation on the other hand includes all such
expenses/costs of business which may or may not involve actual monetary expenditure.
For example if owner of a business venture uses his personal land and building for
running the business venture and he/she does not charge any rent for the same then
such head will not be considered/included while computing the Money Cost but this head
will be part of Real Cost computation.

5. Accounting Cost and Economic Cost
Accounting Cost includes all such business expenses that are recorded in the book of
accounts of a business firm as acceptable business expenses. Such expenses include
expenses like Cost of Raw Material, Wages and Salaries, Various Direct and Indirect business
Overheads, Depreciation, Taxes etc.
Accounting Cost: Various allowed business expenses. Such as Cost of Raw Material,
Salaries and Wages, Electricity Bill, Telephone Charges, Various Administrative
Expenses, Selling and Distribution Expenses, Production Overhead Expenses, Other
Indirect Overhead Expenses etc.
Economic Cost on the other hand includes all the accounting expenses as well as the
Opportunity cost of a business firm.

6. Private Cost and Social Cost
The actual expenses of individuals/ firms which are borne or paid out by the individual or a firm
can be termed as Private Cost
Social Costs. This is the total cost to society.May also be referred to as ‘True costs’
A Company, 'Giga Dyes and Chemicals limited' is producing chemical dyes that are being used in
various industrial activities. Various production expenses are as follows: Cost of Raw Material - 5,
00, 000, Salaries and Wages - Rs. 9, 00, 000, Various Direct and Indirect Overhead Expenses -
Rs. 12, 00, 000, Selling and Distribution Expenses - Rs. 4, 00, 000. The by-product of the
production process of chemical dyes produced by Giga Dye are certain toxic chemicals which are
being released by 'Giga Dye and Chemicals' directly into a river flowing near the Dye
manufacturing plant. This is polluting the river and killing the organic life thriving in as well as
near the river. The cost of loss to the environment caused by Giga is estimated to be Rs. 20, 00,
000 per annum.

7. Cont...
In the above case, the Private Cost for 'Giga Dye and Chemicals Limited is Rs. 30,00,
000. This is sum total of various business expenses of Giga such as Cost of Raw
Material, Salaries and Wages Overhead Expenses and Selling and Distribution Expenses.
On the other hand Social Cost is Rs. 50, 00, 000. This includes the cost of damage to the
environment caused by the activities of the firm. Thus Social cost is Private Cost +
External cost. In this case this is = 30, 00, 000 + 20, 00, 000

8. Fixed Cost, Variable Cost, Average Cost and
Marginal Cost
Fixed Cost is that cost which does not change irrespective of whether the firm is
operating or not.
Example Rent of the factory premises, Wages of administrative employees etc. In other
Fixed cost is not related direct production/manufacturing expenses.
Variable Cost is directly proportional to the production operations.
▪ For example Assume a business produces clothing. A variable cost of this product
would be the direct material, i.e., cloth, and the direct labor.

9. Cont...
Marginal Cost is the change in the Total cost when an additional unit of good is
produced. In other words Marginal Cost is difference between total Cost of producing ‘N
+ 1’ units of good and ‘N’ units of good.
If the total cost of 3 units is 1550, and the total cost of 4 units is 1900. The marginal
cost of the 4th unit is 350.

11. Thank You!!!