This document discusses different types of costs that are relevant for business decision making. It defines fixed costs as those that do not vary with production output, such as rent, taxes, and insurance. Variable costs vary with production output and include direct labor and materials. Incremental cost is the additional cost of increasing production by one unit, which may be different than average costs. Understanding these cost concepts is important for firms to efficiently operate and determine prices relative to their competitors.

1. Fixed variable
&incremental cost.

2. • Abu Umeer
• 14ch42.
• Bilal
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3. Cost?
 It is used for analyzing the cost of a
project in short and long run.
• Expenditure incurred in producing a
product or in rendering a service
• measurement, in monetary terms, of
the amount of resources used for the
purpose of production of goods or
rendering services.

4. IMPORTANCE OF COST
 Regardless of industry in which a firm
operates costs, are relevant and of major
importance to efficient operation of that
firm
The concept of cost is central to
business decision making.

5.  A firm which produces its goods and services at
comparatively lower cost with a qualitative edge over its
competitor will not only survive but also prosper.
 Prices are determined by cost in all market structure
 To make effective business decisions, the business
manager needs to be aware of a number of costs concepts
and their respective uses.

6. Types of Cost:
Actual costs and opportunity costs
Marginal, incremental, and sunk costs
Replacement costs and historical costs
Urgent costs and postponable costs
Fixed and variable costs
Total ,average and marginal cost
Short-run costs and long-run costs
Private costs and social costs

7. FIXED COST:
⌂ Fixed costs are those costs, which do not vary
with the changes in the output of a product.
⌂ They are associated with the existence of a firm's
plant and, therefore, must be paid even if the
firm's level of output is zero.
⌂ . All costs that do not fluctuate directly with
production volume are fixed costs.
⌂ . FC is independent of output.
⌂ Eg: Depreciation, Interest Rate, Rent, Taxes
⌂ executives’ salaries,, and insurance expenses.

8. .
• Total fixed cost (TFC):
All costs associated with the fixed input.
• Average fixed cost per unit of output:
AFC = TFC /Output

9. VARIABLE COSTS
⌂ Variable costs are those costs that vary with the level
of output.
⌂ Variable costs increase but not necessarily in the same
proportion as the increase in output.
⌂ Variable Costs is the rest of total cost, the part that
varies as you produce more or less. It depends on
Output.
⌂ Variable cost equals total cost minus fixed cost.
Eg: Increase of output with labour. direct labor and direct
materials costs.

10. • Total variable cost (TVC):
All costs associated with the variable input.
• Average variable cost- cost per unit of output:
AVC = TVC/ Output

11. INCREMENTAL COST.
• Incremental cost is the cost associated with
increasing production by one unit. Because some
costs are fixed and other variable, the incremental
cost will not be the same as the overall average
cost per unit. The cost figure can be used for a
variety of economic calculations, most notably the
point at which increasing production ceases to be
efficient.

12. • A very simple example would be a factory making
widgets where it takes one employee an hour to
make a widget. As a simple figure, the incremental
cost of a widget would be the wages for the
employee for an hour plus the cost of the materials
needed to produce a widget.