The document discusses various cost concepts including: - Real cost refers to the actual quantities of factors used in production, while money cost expresses costs in monetary terms. - Explicit costs are actual expenses paid by the firm, while implicit costs are theoretical expenses not captured in accounting. - Fixed costs remain constant regardless of output levels, while variable costs fluctuate with output. - Historical cost refers to the original price paid, while replacement cost is the current price to acquire the same assets. - Private costs affect individual firms, while social costs impact society as a whole.

1. Cost Concepts And Cost Behaviours

2. Aasiya
Jai
Rabah
Sarah
Sabiq
SaudEram
Nida
Ravi
Shivam
Name Of The Group Member

3. Meaning
Cost of production is an influential factor on the
supply side. It refers to the expenditure incurred on
the various factors of production like land, labour
,capital and organization which are used in the
production of a commodity. It denotes the
remuneration paid to the factors of production for
their services. The various cost consents are as
follows

4. Real Cost
 Its refer to the actual quantities of various
factors used in production a commodity.
 For Example :- the real cost of production a
chair is the amount of wood, nails,
carpenters , labour, etc.
 According to Alfred Marshall “the real
cost of production should includes the toils,
troubles involved, pollution generated,
ETC. since this concept is an abstracts one,
it is very difficult to measure it precisely”.

5. Money cost
 It is the cost of production expressed in terms of
money. It is the money spent on the various
resources used in the production process.

6. Explicit Cost Implicit Cost
Explicit costs are those expenses that are
actually paid by the firm (paid-out-
costs). They are generally recorded in
books of account.
Implicit costs are theoretical expenses in
the sense that they go unrecognized by
the accounting system. May be defined
as the earnings of those employed
resources that belong to the owner
himself
For E.g. Cost of raw materials, wages
and salaries, power charges, transport
expenses, etc.
This expenditure is actually incurred by
the firm. Since they are recorded, they
are known as accounting cost
For E.g. The entrepreneur may be using
his own land. Rent may not be paid for
this. If he had rented it out to somebody
he would have earned some rent. This
should be considered and some amount
of rent should be included in the cost of
production.
Explicit Cost And Implicit Cost

7. Economic Cost And Accounting Cost
Economic Cost Accounting Cost
Unlike accounting costs, economic costs
consider both the explicit and implicit costs
to the company that occur during the fiscal
year. Implicit costs are associated with
resources that are provided to the company
with no price tag
Accounting costs come from the total explicit
costs of the company during the fiscal year.
Accounting costs do not include implicit
costs resulting from unused resources.
Explicit costs with defined monetary values
are factored into the accounting costs of the
company to calculate net income at the end
of the fiscal year.
For example, if a company operates out of a
building it owns, it experiences an implicit
cost from the rent it could earn from leasing
the building to another company. The
building could earn $3,000 a month from a
commercial renter, so the company has an
implicit cost of $3,000 to add to its
economic costs.
For example, if the company spends
$100,000 on employee wages, $50,000 on
equipment purchases and $20,000 on
inventory, the total accounting costs are
$170,000 for the year.

8. Fixed Cost And Variable Cost
Fixed Cost Variable Cost
It refers to the cost incurred on the fixed
factors of production
Its refer to the cost incurred on the variable
factors of production
This cost remains constant irrespective of the
levels of outputs
It varies with levels of outputs
Even if the outputs is nil, fixed cost will be
incurred
This cost will increase /decrease with the
levels of outputs.
This is also known as supplementary costs or
overhead costs
This is also known as prime costs.
Its includes:
a) Rent for the building
b) Interest paid on capital
c) Insurance premium
d) Property taxes
e) Depreciation and maintenance
allowances, etc.
It includes
a) Prices of raw materials
b) Wages of labours
c) Excise duties, sales tax
d) Transport expenditure Etc.

9. Historical Cost And Replacement Cost
Historical Cost Replacement Cost
Historical cost states the cost of plant,
equipment and materials at the price
originally paid for them
Replacement cost means the price that
would have to be paid currently for
acquiring the same plant.

10. Private Cost And Social Cost
Private Cost Social Cost
The micro level economic costs.
If the decision of a firm to expand
Its output leads to increase in its cost,
It is private cost
Are those which are actually incurred
Or provided for
By an individual or firm
For its business activity.
The macro level economic costs.
If it leads to certain costs to the society,
May be in the nature of
Greater pollution, congestion etc
Social cost is the total cost to the society
on
Account of production of a good.

11. Marginal Cost And Incremental Cost
Marginal Cost Incremental Cost
Marginal cost refers to the cost incurred
in producing an additional unit of the
output.
Incremental costs are defined as the
change in overall costs that result from
particular decisions being made
For e.g. introducing of new marketing
and adverting strategic production of a
components of the product instead of
outstanding, etc. will affect the total cost

12. Sunk Cost And Future Cost
Sunk Cost Future Cost
Sunk cost is the one not affected or
altered by a change in the level or nature
of business activity.
Future costs are the estimates of time
adjusted past or present costs and are
reasonably expected to be incurred in
some future period or periods.
For e.g. when a car is purchased, it can
subsequently be resold; however, it will
probably not be resold for the original
purchase price. The economic loss is
the difference (including transaction
costs).

13. Opportunity Cost
 An opportunity cost is the sacrifice you make when you use
a resource for one purpose instead of another
 Opportunity costs are implicit costs that do not appear
anywhere in the accounting records
 Machine time used to make one product cannot be used to
make another, so a product that has a higher contribution
margin per unit may not be more profitable if it takes
longer to make.
 Management accountants often use the concept of
opportunity cost

14. Continued…………
 It is useful to a businessman for a number of
purpose:-
 a) it is useful to determine the relative prices of the
different goods.
 b) it helps in determining the normal earning of a
factor. If the factor has to be retained in the
present job, it should be paid atleast the amount it
can get in the next best job.
 c) it helps in decision-making and optimum
allocation.

15. While analysing the cost data of a firm, the
following types of costs are considered
 Total Cost(TC):- It is the total expenditure incurred by the firm in
production a given level of output. It is obtained by multiplying factor
prices with their quantities. Symbolically it is expressed as TC=f (Q)
(which implies that total cost varies with output.
 Total Fixed Cost:- it is the total cost incurred on the fixed factors of
production. TFC remains same at all levels of output in the short run.
 Total Variable Cost:- In the short run some factors are variable.
The cost incurred on these variable factors is called total variable cost.
 Average fixed Cost (AFC):- AFC is the total fixed cost divided by
total units of the output. i.e. AFC=TFC. AFC is the fixed cost per unit
of the output. Q
 Average Variable Cost:- it is the total fixed cost divided by the
total units of output.
 AVC=TVC. It is the variable cost per unit of output
 Q

16. Continued………………
 Average Total Cost (ATC):- It is total cost divided by
the units of output. ATC=TC.
Q
 It is the average cost per unit of the output. It can also be
calculated as the sum of the average fixed and average
variable cost.
 Marginal Cost:- it is cost of production an extra unit of
the output. It is calculated as MC=TCn – TCn-1 i.e. Total
cost of producing n unit of the output-total cost of
producing (n-1) unit of the output.
 the above cost concept can be explained with
the help of the following table:-

17. Short Run And Long Run Cost Curves
 The TFC, TVC, AND TC curves in the short run can be
as follows:-
In this table the TFC curves is a
horizontal straight line indicating
that whatever be the level of
output, TFC will remain the same.
The TVC curve starts from the
origin. Initially it rise gradually
and then becomes steeper
denoting a sharp rise in total
variable cost.

18. Continued…………..
 The AVC, ATC,AFC and MC curves in the short run
are represented as follows:
In this graph the AFC curve is
a rectangular hyperbola. It
implies that total fixed cost is
constant throughout. The AFC
keeps falling. It indicates that
fixed costs are spread out
when output is increased.

19. Relationship
between average
and marginal cost
Average cost is
calculated by dividing
total cost by the
number of units
produced while
marginal cost is an
increase in total cost
resulting from an
increase of one unit in
production. If average
cost is falling, marginal
cost will fall more
sharply. If average cost
is increase, marginal
cost will increase more
sharply.
0
500
1000
1500
2000
2500
0 5 10
MC
AC
Optimum Production Capacity
P
Unit Of Production
CostRs
In the above diagram, unit of production have been
shown on X-axis and costs on Y-axis.AC is average
cost curve. MC is marginal cost curve and P is the point
at which MC and AC intersect each other. Diagram
makes it clear that when AC falls more sharply and
when AC increase, MC increase more sharply. MC cuts
AC curve when AC.

20. Long Run Average Cost Curve(LAC)
Meaning:-
Long run average cost means total cost means total long-run cost
divided by the number of units produced. Long-run average cost t
different levels of production. it can be illustration with the help of
diagram.
o
A
B
C
D
E G
F
M1 M2 M3 M4
SAC1
SAC2
SAC3
Optimum Production Point
Minimum Cost Point
Y
X
Unit Of Production
In diagram quantity of production has
been presented on x-axis and the
cost of production has been
presented on y-axis. The diagram is
based on the assumption that there
are only three plan of production
available with the firm large medium
and small. Short-run average cost
curves of these plans have been
presented as SAC1, SAC2,SAC3. In
long- run, the firm will have to select
any one of these three plans.
Suppose the firm decides to produce
OM1 quantity of production, the firm
will have to use SAC1 and its
average cost will be AM1. Though the
firm can use SAC2 also to produce
the same quantity but in this case its
cost will be BN1. Which is more than
AM1. therefore the firm will be SAC1
to get OM1 quantity of production and
its average cost will be AM1. since
EM3 is the minimum cost. Therefore,
the firm must produce OM3 quantity
of production at SAC2. It will be the
optimum point of production.

21. Optimum Firm
In the diagram, the LAC curve is enveloping a number of short run average cost
curve. The firm is said to be optimum when it employs the plant SAC2 it produce OQ
level of output at the minimum cost of production. Here the minimum point of SAC
and LAC coincide with each other. Thus an optimum firm is one which produce at
the minimum point of the long run average cost curve.

22. The Learning
Curve.
This concept is of
recent origin. It was
developed by the
economist Arrow.
According to him, a
firm learns through
experience uses the
resources in the
possible manner
and lowers the cost
of production.
This termed by him
as “Learning By
Doing”.
Here, the learning curve slopes downward indicates
the declines in the cost as the output increase

23. Thank You