Cost Concepts_Parakramesh Jaroli_MBA

1. Presented By:
Parakramesh Jaroli
MBA (Dual) II - Semester

2. Cost Concepts

3. Cost concepts
• Cost Concepts which are relevant to business
operations and decisions can be based on 2
categories
1. Concepts used for accounting purposes
2. Analytical cost concepts

4. Opportunity cost
• 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.

5. Actual Costs
• Actual costs are those which are actually
incurred by the firm in payment for labor,
material, plant, building, etc.

6. Business costs and Full Costs
• 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
• Full Costs includes business costs, opportunity
cost and normal profit.

7. Explicit and Implicit Costs
• Explicit costs are those which fall under actual
costs entered in the books of accounts
• 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.

8. Out of Pocket and Book Costs
• The items of which involve cash payments, both
recurring and non-recurring, are known as out-of-
pocket costs
• 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.

9. Fixed Costs and variable costs
• 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.
• Variable costs are those that vary with the
variation In total output

10. Total, average and Marginal costs
• Total cost is the total expenditure incurred in the
production of goods and services
• Average cost is not actual cost. It is obtained by
dividing the total cost by the total output
• Marginal cost is the addition to the total cost on
account of producing one additional unit of product.

11. Short Run and long run costs
• Short run costs are costs that vary with variation in
output. Short run costs are the same as variable
costs
• Long run costs are costs that are incurred on fixed
assets like plant, machinery, etc
• It is to be noted that running costs and depreciation
of capital assets are included under short run costs

12. Incremental and Sunk Costs
• 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
• Sunk Costs are those which cannot be altered,
increased or decreased by varying the rate of output

13. Historical and replacement cost
• Historical cost refers to the cost of an asset
acquired in the past.
• Replacement cost refers to the outlay which
has to be made for replacing an old asset.

14. Private and Social Costs
• 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.
• Social Costs refers to the total cost borne by the
society due to production of a commodity