COST CONCEPT AND ANALYSIS

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

ACCOUNTING COST CONCEPTS

• Opportunity Cost And Actual Cost

• Business Cost And Full Costs

• Explicit Cost And Implicit Cost

• Out- Of- Pocket And Book Cost

ACCOUNTING COST CONCEPTS1. 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.

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.

ANALYTICAL COST CONCEPTSThe 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.

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

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.

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.

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 .

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.

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.

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.