2. The cost concepts that are relevant to
business operation and decisions can be
grouped on the basis of their nature and
propose under to overlapping categories:-
1. Cost concept used for accounting propose
2. Analytical cost concepts and used in
economic analysis of business activities
COST CONCEPTS
3. ACCOUNTING COST
CONCEPTS :-
Opportunity Cost And Actual Cost
Business Cost And Full Costs
Explicit Cost And Implicit Cost
Out- Of- Pocket And Book Cost
4. ACCOUNTING COST CONCEPTS
1.Opportunity cost and actual cost-
actual cost is all paid out costs of
the business firms to take the
advantages of the best opportunity
available to them. The opportunity
cost is the opportunity lost for lack
of resources. An opportunity to
make income is lost because of
scarcity of resource like land,
labour, capital etc.
5. 2.Business costs and full cost:-
business costs include all the
expenses that are incurred to
carry out a business. The
concept of business costs is
similar to the actual or real
costs.
6. 3. Explicit Costs and Implicit
Costs:- The actual or explicit
costs are those which are
actually incurred by the firm in
payment for labour, material,
plant, building, machinery,
equipment, travelling and
transport, advertisement, etc.
the total money expenses,
recorded in the book of account
are, for all practical purposes,
the actual costs.
7. ANALYTICAL COST CONCEPTS -
Fixed And Variable Cost
Total, Average And Marginal Costs
Sort-run And Long-run Cost
Incremental Costs And Sunk Costs
Historical And Replacement Cost
Private And Social Costs
8. FIXED AND VARIABLE COST
Fixed Cost:- FC are that remain fixed an amount for a
certain quantity of output. Fixed cost those not vary with
variation in the output between zero and a certain of
output. In other words, cost that do not vary or remain
constant for a certain level of output are treated as fixed
cost.
Variable Cost:- VC are those which vary with the
variation in the total output. Variables cost include cost of
raw material, running cost of fixed capital, such as fuel,
repairs routine maintenance expenditure, direct labour
charge associated with the labour of the output and the
costs of all other inputs that vary with outputs.
9. TOTAL, AVERAGE AND
MARGINAL COSTS
Total Cost:- TC refers to the total outlays of
money expenditure, both explicit and implicit, on the resources
used to produce a given level of output. It includes both fixed
and variable cost.
Average Cost:- AC is of statistical nature-it is
not actual cost. It is obtained dividing the total cost (TC) by the
output.
Marginal Cost:- MC is defined as the addition to
the total cost on account of producing one additional unit of
the product. Or, marginal cost is the cost of the marginal unit
produced.
10. SHORT-RUN AND LONG-RUN COST
Short-Run:- Sort-run refers to the
time period during which scale of
production remain unchanged. The cost
incurred in the sort-run are called sort-run
costs. It includes both the variable and the
fixed costs.
Long- Run:- long-run cost on the
other hand are those that are incurred
increase the scale of production in the
long run . The costs are incurred on
the fixed factor like plant , building
,machine etc .
11. HISTORICAL AND
REPLACEMENT COST
Historical Cost: HC refers to the cost
incurred in past on the acquisition of
productive assets, e.g. land, building,
machinery, etc.
Replacement Cost: RC refers to the
expenditure made for replacing an old asset.
These concepts owe their significance to the
unstable nature of input prices. Stable prices
over time, other given, keep historical and
replacement costs on par with each other.
Instability in asset prices makes the two costs
differ from each other.
12. PRIVATE AND SOCIAL COSTS
Private Cost: PC are those which are actually
incurred or for provided for by an individual or a
firm on the purchase of goods and services from
the market. For a firm, all the actual costs, both
explicit and implicit, are private costs. Private
costs are internalized costs that are incorporated
in the firm’s total cost of production.
Social Cost: SC on the other hand, refers to
the total cost born by the society due to
production of commodity. Social costs include
both private cost and the external cost.
