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Cost Concepts


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Published in: Technology

Cost Concepts

  1. 1. Cost Concepts
  2. 2. Cost concepts <ul><li>Cost Concepts which are relevant to business operations and decisions can be based on 2 categories </li></ul><ul><li>Concepts used for accounting purposes </li></ul><ul><li>Analytical cost concepts </li></ul>
  3. 3. Opportunity cost <ul><li>The opportunity cost may be defined as the expected returns form the second best use of the resources which foregone due to the scarcity of resources. The opportunity cost is also called alternative cost. Had the resource available been unlimited, there would be no opportunity cost. </li></ul>
  4. 4. Actual Costs <ul><li>Actual costs are those which are actually incurred by the firm in payment for labor, material, plant, building, etc. </li></ul>
  5. 5. Business costs and Full Costs <ul><li>Business costs include all the payments and contractual obligations made by the firm together with the book of costs of depreciation on plant and equipment </li></ul><ul><li>Full Costs includes business costs, opportunity cost and normal profit. </li></ul>
  6. 6. Explicit and Implicit Costs <ul><li>Explicit costs are those which fall under actual costs entered in the books of accounts </li></ul><ul><li>In contrast, there are costs that do not take the form of cash outlays nor do they appear in the accounting system. Such costs are called Implicit or Imputed Costs. </li></ul>
  7. 7. Out of Pocket and Book Costs <ul><li>The items of which involve cash payments, both recurring and non-recurring, are known as out-of-pocket costs </li></ul><ul><li>There are certain actual business costs which do not involve cash payments, but a provision is made in the books of accounts and they are taken into account while making the profit and loss accounts. Such expenses are known as book costs. </li></ul>
  8. 8. Fixed Costs and variable costs <ul><li>Fixed costs are those which are fixed in volume for a certain given output. Fixed cost does not vary with variation in output between zero and a certain given level of output. </li></ul><ul><li>Variable costs are those that vary with the variation In total output </li></ul>
  9. 9. Total, average and Marginal costs <ul><li>Total cost is the total expenditure incurred in the production of goods and services </li></ul><ul><li>Average cost is not actual cost. It is obtained by dividing the total cost by the total output </li></ul><ul><li>Marginal cost is the addition to the total cost on account of producing one additional unit of product. </li></ul>
  10. 10. Short Run and long run costs <ul><li>Short run costs are costs that vary with variation in output. Short run costs are the same as variable costs </li></ul><ul><li>Long run costs are costs that are incurred on fixed assets like plant, machinery, etc </li></ul><ul><li>It is to be noted that running costs and depreciation of capital assets are included under short run costs </li></ul>
  11. 11. Incremental and Sunk Costs <ul><li>Incremental costs are closely related to marginal costs but while marginal refers to the cost of the marginal unit of output, incremental costs refers to the total additional cost associated with the expand in output </li></ul><ul><li>Sunk Costs are those which cannot be altered, increased or decreased by varying the rate of output </li></ul>
  12. 12. Historical and replacement cost <ul><li>Historical cost refers to the cost of an asset acquired in the past. </li></ul><ul><li>Replacement cost refers to the outlay which has to be made for replacing an old asset. </li></ul>
  13. 13. Private and Social Costs <ul><li>Private costs are those which are actually incurred or provided for by an individual or a firm on the purchase of goods and services from the market. For a firm, all actual costs both explicit and Implicit are private costs. </li></ul><ul><li>Social Costs refers to the total cost borne by the society due to production of a commodity </li></ul>