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Cost computation


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Cost computation

  1. 1. COST COMPUTATION<br />Presented By: Karl Brian M. Joble<br />
  2. 2. What is Cost? <br />Anything incurred during the production of the good or service to get the output into the hands of the customer.<br />An amount paid or required in payment for a purchase.<br />Note<br />Controlling costs is essential to Business Success.<br />It is important to point out that production involves cost. <br />
  3. 3. Cost Theory<br />Offers an approach to understanding the costs of production that allows firms to determine the level of output that reaps the greatest level of profit at the least cost. –<br /><ul><li>Contains various measures of costs. These include a firm's fixed costs and variable costs.</li></ul>Aside from Monetary and Economic Resources also have Opportunity Cost. Opportunity cost is the opportunities forgone in the choice of one expenditure over others. –<br />
  4. 4. Cost Concept: Economic Costs<br /> Private vs. Social Cost<br />Private – Are expenses shouldered by individual producers. Ex. Rent and Cost of Material<br />Social – Additional Cost are involved that are not paid by the producers but are Bourne by the society. Ex. Cement for Highways<br /> Explicit vs. Implicit Cost<br />Explicit – consist of actual payments made by the firms for resources bought or hired<br />Implicit – Cost of Self owned or Self employed resources.<br />Total Fixed vs. Total Variable Cost – Short-run<br />Fixed – Resources whose quantity cannot be readily be changed for short run. (Salaries, Rent, Insurance, Maintenance)<br />Variable – Can be readily changed when output is increased in short run.<br /> (Wages of Laborers, Cost of Raw Materials and Transportation)<br />
  5. 5. Short-run Cost Schedule<br />
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  8. 8. Marginal costs(MC) – The cost of producing an extra unit of output. MC = Change in TC / Change in Q<br />Total Cost (TC) – Composed of total Fixed Cost and Total variable Cost. TC = FC + VC<br />Average Fixed Cost (AFC) – Decreases continuously as output increases. The Greater Output the Smaller the AFC. Due to fixed cost that is spread to more output levels. AFC = FC/Q<br />Average Variable Cost (AVC) – Refers to the variable costs per unit of output produced by the firms.<br />AVC = VC/Q<br />Average Cost (AC) – Obtained by Dividing TC by Level of Output, it also obtained by adding the sum of AFC and AVC. AC = TC/Q or AC = AFC + AVC<br />
  9. 9. SUMMARY<br />Economic costs are incurred in producing output. These Cost can be private or social, explicit or implicit, fixed or variable. <br />In the short-run, firms pays both fixed and variable costs. Thus, total cost is the sum of total fixed cost and total variable cost.<br />Fixed costs are part of the total cost and do not depend on output. Variable cost are dependent on the output.<br />When AC and AVC are falling, MC is below them. When AC and AVC are rising, MC is above them.<br />
  10. 10. MC and AC intersect at the minimum point of AC. MC and AVC intersect at the minimum point of AVC.<br />The average FC keeps falling as output is increased<br />As output rises, the share of FC in average costs becomes smaller and negligible<br />REFERENCE:<br /><ul><li> Macarubbo, Josefina (2005) “Basic Economics”. Quezon City Phil: New</li></ul> Horizon Publication.<br /><ul><li>Sicat, Gerardo. Costs, Supply, and the Firm. Economics. </li>