There are several types of costs including opportunity cost, actual cost, direct cost, indirect cost, explicit cost, implicit cost, historical cost, replacement cost, fixed cost, variable cost, real cost, prime cost, average cost, marginal cost, total cost. Direct costs are directly related to production while indirect costs are not. Fixed costs remain unchanged with production volume while variable costs change. Cost analysis can help businesses determine the most profitable production level and price of products.

1. Types of Cost

2. A cost is the value of money that has been used up to
produce something.

3. Definition of cost
Theexpenses faced by the business in the processof
supplying goodsand services toconsumer

4. Types of costs
 Opportunity cost and actualcost
 Direct and indirectcost
 Explicit and implicitcost
 Historical and replacementcost
 Fixed cost and variablecost
 Real and primecost
 Total,average,and marginal cost

5. Opportunity cost and actual cost
Opportunity cost : Cost incurredfor
loosing next bestalternative
Actual cost : An actual amountpaid or incurred, as
opposed toestimated costorstandard cost.

6. Explicit and implicit cost
Explicit cost refers to the money expended to buy or
hire resources from outside the organization for the
process of production
Implicitcost refers to thecostof useof the self owned
resources of organization thatare used in production

7. Direct and Indirect cost
Direct cost is acost.
Direct Cost: Directcosts are thosecost that havedirectly
accountable to specific cost object such as a process or
product
Ex:wages paid ,salary paid labor, material…etc
Indirectcost:
Indirect cost are those costs which are not directly
accountable to specific cost object or not directly related to
production
Ex: insurance, mentainence ,telecom, ….etc

8. Historical and replacement cost
Historical cost refers to theoriginal (actual) cost
incurred at the time theassetwasacquired
The replacementcost is the price thatan entitywould
pay to replace an existing assets at current market
price that may not be marketvalueof thatasset.

9. Real cost and Prime cost
Real cost of a production refers to the physical quantities
of various factors used in producingcommodity
Ex: Real costof a tablecomposesof a carpenter’s laborto
cubic feet of a wood ,a dozen of nails, half a bottle of
varnish…..etc
“ Real cost thus signifies the aggregate of real
productive resources absorbed in the production”

10. Prime cost
Thedirect costof commodity in termsof the materials
and labor involved in its production excluding fixed
cost
Bycalculating primecost the firm can decide how much
should be theirselling price toearn profit

11. Fixed and variable cost
Fixed cost is the cost that remains unchanged
irrespectiveof theoutput level orsales revenuesuch as
intrest,rent,salariesetc
Variablecost are thoesecosts thatvarydepending on a
company’s production volume; they raise as
production increases and fall as productiondecreases

12. Average fixed cost (AFC)
Average fixed cost is the total fixed costdivided bytotal
units of output
TFC
AFC =
Q
Where Q is the numberof units produced

13. Average Variable cost
Averagevariablecost is total variablecostdivided by
quantityproduced
TVC
AVC =
Q
Where Q is thequantity
produced

14. Total cost
Total cost : it is the cost refers to the total expenses
incurred in reaching a particular level ofoutput
TC = TVC + TFC

15. Average cost
Averagecost is the total costdivided by total unitsof
outputThus,
TC
AC =
Q
Where Q is the quantityproduced

16. Marginal cost
The marginal cost is also per unit cost of production. It is
the addition made to the total cost by producing one
more unit ofoutput
MCn = TCn – TCn-1
i.e the marginal cost of the unit of output is the total cost
of producing n units minus the total cost of producing
n-1 (i.e …one less in the total) units of output

17. Typical Total Cost Curves
 TVC,TC is always increasing:


First at a decreasing rate.
Then at an increasing rate

18. Typical Average &
Marginal Cost Curves

19.  AFC is always
declining at a
decreasing rate.


ATC and AVC decline
at first, reach a
minimum, then
increase at higher
levels of output.
The difference
between ATC and AVC
is equal to AFC.



MC is generally
increasing.
MC crosses ATC and
AVC at their minimum
point.
If MC is below the average
value:


Average value will be
decreasing.
If MC is above the average
value:
 Average value will be
increasing.

20. Managerial uses of cost analysis
 Tofind mostprofitable rateof operation of the firm
 Todetermine in advance thecostof business
operations
 Tofix the price of theproduct
 Todecidewhatsaleschannel touse
 To haveclarityabout thevariouscostconcepts