1. Cost Analysis

2. Contents :
Cost Analysis:
1. Cost Concept:
i. Definition of Cost
ii. Different types of Costs
iii. Cost Control and Cost Efficiency
• Cost-Output Relationship
2. Break Even Analysis:
i. Meaning of BEA
ii. Determinants of BEP
iii. Simple Problems on BEP

3. Introduction to Cost Analysis
₹Cost is a major source for ‘Profit Maximization’
₹Cost is a main consideration for ‘Every Business Decision’
₹Cost is the matter for ‘Every Activity of Business’
₹Cost is a issue for acquisition of ‘Factors of Production’
₹Cost is subject for expansion of ‘Business Operations’
₹Cost is a weapon to fight with ‘Market Competition’
₹Cost is a question for ‘Success of a Technology’
₹Cost is significant to attain ‘Customer Satisfaction’
₹Cost is a foremost challenge to ‘Entrepreneurial Success’
₹Cost is an important aspect to ‘Managerial Economist’

4. Definition of Cost
• Cost refers to the money incurred to produce a
particular product or service.
• All costs involve a sacrifice of some kind or other to
acquire some benefit
• Cost incurred to perform all the activities of a business
process where starting from purchase factors of
production to selling of product in market.
• Cost is called as ‘Cost of Production’
• Cost of Production - ‘Total Cost of Business Activities’

5. Types of Cost
S.NO. COST CONCEPTS BASIS
1 Short Run Cost vs. Long Run Costs Time Factor
2 Variable Cost vs. Fixed Costs Degree of Variability
3 Opportunity Cost vs. Outlay Cost Nature of Sacrifice
4 Past Cost vs. Future Cost Degree of Anticipation
5 Separate Cost vs. Joint Cost Unit of Operation
6 Out of Pocket Cost vs. Book Cost Involvement of Cash flow
7 Incremental Cost vs. Sunk Cost Increasing level of Activity
8 Escapable Cost vs. Unavoidable Cost Degree of Compulsion
9 Controllable vs. Non-controllable Cost Degree of Controllability
10 Replacement Cost vs. Historical Cost Timing of Valuation
11 Urgent Cost vs. Postponable Cost Degree of Urgency

6. Cost-Output Relationship
• Understanding the nature and behavior of costs is
must for regulation and control of cost of production.
• The cost of production depends on many forces and an
understanding of the functional relationship of cost to
various forces like Output is an important factor.
• It is to determine the optimum level of production.
• Cost-Output relation helps the manager in cost control,
profit prediction, pricing, promotion etc.
• Cost function is C = f (S,O,P,T….n)
• Cost function is Cost – Output Relation

7. Cost-Output Relation
• Total costs is the actual money spent to produce a
particular quantity of output. Total cost is the
summation of Total Fixed and Variable cost
• Formula to calculate : TC = TFC + TVC
• Average Cost : AC = TC/Q
• Average Fixed Cost : AFC = TFC/Q
• Average Variable Cost : AVC = TVC/Q
• Marginal Cost (MC) is the addition to the total cost
due to the production of an additional unit of product
• MC = Change in Total Cost / Change in Total Output

8. Cost-Output Relationship
Units
of
Outpu
t (Q)
Total
Fixed
Cost
(TFC)
Total
Variable
Cost
(TVC)
Total
Cost
(TC=TFC
+TVC)
Averag
e Fixed
Cost
(AFC=T
FC/Q)
Average
Variable
Cost
(AVC =
TVC/Q)
Average
Cost
(AC=TC/
Q)
Marginal
Cost
(MC)
1 60 20
2 60 36
3 60 42
4 60 64
5 60 95
6 60 132

9. Graph: Cost-Output Relationship
MC
ATC
AVC
AFC

10. Graph: Cost-Output Relationship
MC
ATC
AVC
AFC
Average Fixed Cost (AFC)
curve continues to fall as
output rises an account of
its spread over more and
more units Output

11. Graph: Cost-Output Relationship
MC
ATC
AVC
AFC
Average Variable Cost
(AVC) curve first falls
and than rises due to the
operation of the law of
variable proportions

12. Graph: Cost-Output Relationship
MC
ATC
AVC
AFC
The behavior of ATC curve depends
upon the behavior of AVC and AFC
curve. Initial stage of production
both AVC and AFC decline and
hence ATC also decline still AFC
=AVC. But after a certain point
AVC starts rising so ATC also rise

13. Graph: Cost-Output Relationship
MC
ATC
AVC
AFC
ATC curve is U shaped
because AVC starts
increasing and AVC >AFC.
The lowest point in ATC
curve indicates the least-
cost combination of inputs

14. Graph: Cost-Output Relationship
MC
ATC
AVC
AFC
Where ATC is minimum and
the MC curve intersects AC
curve. It is the point where
per unit cost of production
will be lowest.

15. Why Cost-Output Relationship
1. To determine Least Cost Combination of inputs
2. To understand the behavior of ATC curve, Why It is
U-Shaped
3. To know the affect of AVC curve on behavior of
ATC
4. To know where the total ATC is the minimum and
where the MC curve intersects ATC curve

16. THANK YOU