A Sanjeev raj
Today we are going to deal with..
• Cost Concepts.
• There are various prevalent cost concepts.
• Cost is understood differently for different purposes.
• Cost may include price to be paid for a good, its
transportation, storage and handling expenses besides
other miscellaneous outflows.
• A Cost which may be relevant for one particular type of
decision is very likely to be meaningless for arriving at
some other decision.
• Relevant Cost.
• Actual Cost.
• Opportunity Cost.
• Fixed Cost.
• Variable Cost.
• Explicit Cost.
• Implicit Cost.
• Total Cost.
• Average Cost.
• Marginal Cost.
• Historical Cost.
• Replacement Cost.
• Short – run Cost.
• Long – run Cost.
• Accounting Cost.
• Economic Cost.
• It is defined as the cost that actually affects a given
business decision and should therefore considered in the
decision – making process.
Costs that are actually incurred in acquiring or producing
a good or service are known as actual costs. Since these
costs are real cash outflows and are generally recorded
in account books, they are also called acquisition or
E.g., Rent, Wages, etc.
• It is the notional cost of sacrificing the alternatives.
• 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, 10, respectively.
• It is not recorded in the books of account.
• They are defined as the cost that remain constant with
respect to the output.
• They might exist even if no output is produced.
Costs that vary with the changes in the output are known
as variable costs.
E.g., Costs of raw material, Wages
Semi Variable Cost: There are some costs which cannot
be so easily distinguished into fixed or variable costs.
E.g., Charges for Electricity, Incentive based salary
- They are out of pocket costs for which a cash payment is
- The Payment for raw material, utilities, wages, etc.
constitutes of explicit costs.
- Costs that don’t involve a cash outlay.
- Also called as Book costs.
- Depreciation and salary of owner, etc.
- Since implicit costs do not involve cash payment, they are
often ignored by firms, especially smaller ones.
• If a building is owned by a firm, then the rent that would
have been received had it been rented would become
the implicit costs.
• However , if the building was taken on rent by the firm,
then the rent would be an explicit cost.
- The sum total of all the costs: fixed, variable, explicit and
implicit for the entire output is known as total cost.
- It is the cost per unit of output and is computed by
dividing the total cost by the number of units produced.
- It is the change in total costs due to the production of
one additional unit of output.
• 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 eleventh unit is Rs.
• It is the change in total cost due to the
production of additional output.
- It is a past cost that was actually incurred at the time of
acquisition of that asset.
- It is the current cost of purchasing that asset now.
Depending upon the nature of the commodity or asset,
the replacement cost will be more than or less than the
- A machine costing Rs. 2 lakh was purchased 5 years
ago. Over time it has depreciated at the rate of 10% per
annum. It is presently worth Rs. 1.18 lakh. Here, Rs. 2
lakh is the historical cost & 1.18 lakh Rs. is its
Short – run costs:
- It is the cost that varies with output when plant and
equipment remain the same.
Long – run costs:
- It is the cost that varies with output when all the factor
- Costs that are recorded in the books of account and are
used for accounting, auditing and financial control and
are known as accounting costs.
- Costs that help in managerial decision making for
achieving the economic objectives of the firm are called