Actual Cost

Opportunity Cost

Fixed Cost

Variable Cost

Accounting Cost

Economic Cost

Explicit Cost

Implicit Cost

Total Cost

Average Cost

Marginal Cost

Incremental Cost

Historical Cost

Replacement Cost

Short-Run Cost

Long-Run Cost

Cost concepts

“Actual Financial Expenditure of Firm.”

Cost that are actually incurred in acquiring or

producing goods and services are known as actual

costs.

generally recorded in account books, they are also

called acquisition or accounting costs.”

Example: Rent, Wages, cost of Raw material etc…

Actual Cost or outlay cost

Opportunity Cost or Alternative Cost

The opportunity cost represents sacrificed alternatives.

Measured in terms of profits from next best alternatives that

are foregone by the firm by using available resources.

- E.g. Consider a firm that has Rs 100. With this amount it

can either make a fixed deposit with a bank and earn an

interest of 10% p.a. or purchase the factors of

production for producing t-shirts. Let the cost of land,

labor capital and management be Rs. 20,35,30,15

respectively.

It is not recorded in the books of accounts.

Fixed Cost & Variable Cost FIXED COST:

They are defined as the cost

that remain constant with

any level of the output.

They might Exist even if no

output is produce.

Ex: Rent, administrative

expenses.

VARIABLE COST:

costs that vary with the

changes in the output are

known as variable costs.

E.g. Costs of Raw material,

wages.

Accounting CostCosts that are recorded in the books of accounts

and are used for accounting, auditing and

financial control are known as Accounting Cost.

Economic CostCosts that help in managerial decision making

for achieving the economic objectives of the

Firm are called Economic Cost.

Explicit Cost

They are out of pocket costs for which a cash payment is made to buy or hire productive resources.

The payment of raw material, utilities, wages etc.

Implicit CostsCosts that don’t involves the cash outlay.

Also called as book cost.

Ex: entrepreneur may use his own land for production for which no rent is to be paid.

I

Depreciation and salary of owner, etc.

Since implicit cost do not involve cash payment, they are often ignored by firms, especially smaller ones.

The sum total of all

the costs: Fixed,

Variable, explicit

and implicit for the

entire output is

known as Total

costs.

Total Costs

Average CostsIt is the cost per unit of output and its computed by dividing the total cost by the number of units produced.

ATC (Average Total Cost) = Total Cost /

quantity = TC/Q

AVC (Average Variable Cost) = Variable cost

/ Quantity = TVC/Q

AFC (Average Fixed Cost) = Fixed cost /

Quantity= TFC/Q

Marginal Cost

It is the change in total costs

due to the production of one

additional unit of output.

E.g., Let the cost of producing

10 units be Rs. 5000 and that

for 11 units be Rs.5050

in this case the average cost of

each unit is Rs.500 and the

Marginal cost of producing the

11th unit is Rs.50.

Because the short

run Marginal cost

curve is sloped like

this, mathematically

the average cost

curve will be U

shaped. Initially

average costs fall.

But, when marginal

cost is above the

average cost, then

average cost starts to

Incremental CostIt is the change in total cost due to the production of additional output.

Replacement Cost

It is the current cost of purchasing that assets now. Depending upon the nature of the commodity or assets, the replacement cost will be more than or less than the Historical cost.

E.g., A Machine costing Rs. 2,00,000 was purchased 5 years ago. Over time it has depreciated @10% p.a. It is presently worth Rs.1,18,000.Here Rs.2,00,000 is Historical Cost and Rs. 1,18,000 is its Replacement Cost.

HISTORICAL COST

It is the original price of plant and

materials paid by the firm.

For example, price of a machine at the time of

purchase in 1990 was 10,000 Rs and currently it

costs 15000 Rs.

Historical cost is – 10,000 Rs

Replacement Cost is – 15.000 Rs

Short-Run Cost

It is the cost that varies with output when plants

and equipments remains the same.

LONG-RUN COST

It is the cost that varies with output

when all the factor inputs change.

Sunk Cost