This document discusses various cost concepts that are relevant for business operations and decision making. It groups the concepts into accounting cost concepts and analytical cost concepts. Some key accounting cost concepts discussed include opportunity cost vs actual cost, business cost vs full cost, explicit vs implicit cost, and out-of-pocket vs book cost. Analytical cost concepts discussed include fixed vs variable cost, total/average/marginal cost, short-run vs long-run cost, incremental vs sunk cost, historical vs replacement cost, and private vs social cost.

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.
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.

5. 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.
4. Out-of-pocket and Book Cost:- The items of
expenditure that involve cash payment of cash
transfer, both recurring and non-recurring, are known
as out-of-pocket costs. In a way, these are payment
made by a firm to its self. Depreciation allowances and
unpaid interest on the owners own funds are the
example of book cost.

6. ANALYTICAL COST CONCEPTS
The analytical cost concepts
refers to the different concepts
that are used in analyzing the
cost- output relationship with
increase in inputs and outputs
and also the cost concepts that
figure in analyzing the effect of
expansions of production on
the society as a whole.

7. ANALYTICAL COST CONCEPTS(Con.)
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. INCREMENTAL COSTS AND SUNK
COSTS
 Incremental Cost: IC are closely related to
the concept of marginal cost but with a relatively
wider connotation. While marginal cost refers to
the cost of the marginal unit (generally 1 unit) of
output, incremental cost refers to the total
additional cost associated with the decisions to
expand the output or to add a new variety of
product, etc.
 Sunk Costs: SC are those which are made
once and for all and cannot we altered, increased
or decreased, by varying the rate of output, nor
can they be recorded.

12. 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.

13. 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.