2. CONTENTS
• CONCEPTS OF COST
• VARIOUS TYPES OF COST
• BREAK EVEN ANALYSIS
• BREAK EVEN POINT
3. CONCEPT OF COST
For every business organization, it is
essential to install a set up as per the nature and
need of the product. Number of employees are
employed in the business organization for
transforming the raw material into finished
products using machines. So, business
organization incurs various types of costs.
So, profit = Total Revenue –Total Costs
4. VARIOUS TYPES OF COST
TOTAL COST
TOTAL COST
Total cost is summation of fixed cost and variable
cost.
Total cost = Fixed cost + Variable cost
5. VARIABLE COST
Variable cost is the cost which varies with number
of unit produced. It increases with increase in number of
units produced and vice versa.
Example - Raw material consumption, Electricity bill, Extra
labour hours etc.
FIXED COST
Fixed cost is the cost which do not vary with
number of units produced. It incurs even if the organization
does not produce a single unit of product.
Example - Rent, Advertising, Insurance, Cost of machine
installation, Salaries of employees, Minimum electricity bill etc.
6. DIRECT COST
Direct cost can be completely attributed to the
production of specific goods or service. Direct costs refer to
materials, labor and expenses related to the production of a
product. Direct cost varies with number of unit produced.
Example – Electricity bill, installation of machinary etc.
INDIRECT COST
Expenses which are not specific to any product or
good, but these type of cost are incurred in combined for the
business are termed as indirect cost.
Example – Rent, Advertising, Maintenance, Security etc.
7. AVERAGE COST
Average cost is equal to total cost divided by the number
of units of goods produced.
Average cost is also known as unit cost.
MARGINAL COST
Marginal Cost is defined as the ratio of change of total
cost to the change in quantity produced.
8. INCREMENTAL COST
Incremental cost is the cost associated with increasing
production by one unit. The incremental cost total is always
made up of purely variable costs.
RECURRING COST
For each item produced or each service performed is
termed as recurring cost.
Example – Insurance premium, Electricity bill etc.
9. NON – RECURRING COST
A one-time Charge incurred as a result of rare event or
activity, such as purchase of machine, building construction,
design, development and investment cost is termed as
non-recurring cost.
SUNK COST
Sunk cost is a retrospective (past) cost that has already
been incurred and cannot be recovered. Sunk costs are
independent of any event that may occur in the future.
10. IMPLICIT COST
An implicit cost, also called an imputed cost, implied
cost, or notional cost, is the opportunity cost equal to what a
firm must given up in order to use factors which it neither
purchases nor hires.
OPPORTUNITY COST
When any of the option is selected out of available
options, other options are not selected. Hence, selector
sacrifices all other options. So, the value which is forgone for
selecting the mutually exclusive alternatives is termed as
opportunity cost.
11. CASH COST
Cash costs are costs are costs that businesses pay
for when using cash, or a check, but not credit. On a cash
accounting basis, the cost paid for by using credit would not
be recorded in the general ledger until the actual cash has
been paid.
SHORT RUN COST
We consider that any company is installing a plant
for manufacturing a product. For certain period of time,
company cannot adjust the number or size of plants. By hiring
more workers only number of products manufactured can be
increased. So, fixed cost incurred in installing the plant cannot
be varied during certain period of time, is termed as short run
cost.
12. LONG RUN COST
After several years, company can either expand the
existing plant or increase the number of plants. So, in long
run cost of plants can be varied and hence it is termed as
long run cost.
13. BREAK EVEN ANALYSIS - BEP
The point at which the company starts to
earn profit is termed as Break Even Point (BEP)
and its analysis is termed as Break Even
analysis (BEA).
Sales revenue = All variable fixed cost
Methods to find out BEP
BEP in Physical Quantity Produced
BEP in terms of Sales Volume
14. BEP in Physical Quantity Produced
BEP is defined as the ratio of total fixed cost to the
contribution per unit. Here, contribution is defined as the
difference between revenue generated and variable cost
incurred.
Where, Contribution (C) = Revenue – Variable Cost
15. BEP in terms of Sales Volume
BEP is defined as the ratio of fixed cost to the
contribution ratio. Contribution ratio is the ratio of total
contribution to the total sales. This indicates the profit per
unit volume sold. So, contribution ratio also known as P/V
ratio.
