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Types of Cost
A cost is the value of money that has been used up to
produce something.
Definition of cost
Theexpenses faced by the business in the processof
supplying goodsand services toconsumer
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
Opportunity cost and actual cost
Opportunity cost : Cost incurredfor
loosing next bestalternative
Actual cost : An actual amountpaid or incurred, as
opposed toestimated costorstandard cost.
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
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
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.
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”
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
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
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
Average Variable cost
Averagevariablecost is total variablecostdivided by
quantityproduced
TVC
AVC =
Q
Where Q is thequantity
produced
Total cost
Total cost : it is the cost refers to the total expenses
incurred in reaching a particular level ofoutput
TC = TVC + TFC
Average cost
Averagecost is the total costdivided by total unitsof
outputThus,
TC
AC =
Q
Where Q is the quantityproduced
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
Typical Total Cost Curves
 TVC,TC is always increasing:


First at a decreasing rate.
Then at an increasing rate
Typical Average &
Marginal Cost Curves
 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.
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

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Types of Cost-PPT f.pptx

  • 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
  • 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