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Cost Concepts
Cost Concepts
AND
CLASSIFICATIONS
FIXED COST AND VARIABLE COST ARE NOT TWO DISTINCT CATEGORIES RATHER THEY ARE THE TWO ENDS OF A CONTINUUM.
FIXED COST
THE COST INCURRED FOR THE INPUTS WHICH CAN BE USED OVER A PERIOD OF TIME PRODUCING MORE THAN ONE BATCH OF GOODS. THE COST INCURRED IN THE FIXED CAPITAL OF THE FIRM eg. EQUIPMENT, MACHINERY, LAND,BUILDINGS, PERMANENT STAFF ARE CALLED AS FIXED COST. FC INCLUDES RENT ON BUILDINGS, INTEREST ON CAPITAL, SALARIES TO THE PERMANENT STAFF, INSURANCE PREMIA, AND CERTAIN TAXES. THESE FIXED COST HAVE TO BE INCURRED EVEN IF THE PLANT IS AT STANDSTILL.
FIXED COST
FIXED COST- CONSTANT COST , SUPPLEMENTARY COST OR OVERHEAD EXPENSES. FIXED COST WILL NOT VARY WITH THE CHANGES IN OUTPUT i.e. WHATEVER BE THE QUANTITY OF PRODUCTION THESE COST REMAIN FIXED.
FIXED COST
VARIABLE COST
THE COST INCURRED FOR THE INPUT WHICH ARE EXHAUSTED BYA SINGLE USE. EXAMPLE RAW MATERIALS,FUEL, PAYMENTS FOR LABOUR ETC. VARIABLE COSTS INCREASE IF THE OUTPUT IS INCREASED.IF THERE IS NO OUTPUT VARIABLE COST IS NILL. VARIABLE COST PRICE COST OR DIRECT COST.
FIXED COST
AVERAGE VARIABLE COST REFERS TO THE VARIABLE COST DIVIDED BY THE NO. OF UNITS OF OUTPUT PRODUCED. AVC=TVC/Q WHERE , AVC = AVERAGE VARIABLE COST TFC =TOTAL FIXED COST Q=NUMBER OF UNITS OF OUTPUT PRODUCED.
THERE ARE SOME COST WHICH MAY INCREASE IN A STAIR STEP FASHION. THEY REMAIN FIXED OVER A CERTAIN RANGE OF OUTPUT; BUT SUDDENLY JUMP TO A NEW HIGHER LEVEL WHEN OUTPUT GOES BEYOND A GIVEN LIMIT.
TOTAL COST
TOTAL COST OF PRODUCTION IS THE TOTAL MONEY EXPENSES INCURRED FOR BUYING THE INPUT REQUIRED FOR PRODUCING A COMMODITY OR A SERVICE. IN ECONOMIC TERM,TOTAL COST INCLUDES THE REMUNERATION FOR THE ORGANIZER. THE REMUNERATION MAY BE CALLED PROFIT.
AVERAGE COST
AVERAGE COST IS THE UNIT COST PRODUCTION. IT IS THE COST PER UNIT OF OUTPUT. AVERAGE TOTAL COST = TOTAL COST/QUANTITY OF OUTPUT.
MARGINAL COST
THE ADDITION MADE TO THE TOTAL COST BY THE PRODUCTION OF ONE ADDITIONAL UNIT OF OUTPUT. MCn = TC TCn-1.
0
1 2 3 4 5 6 7
200
250 290 320 360 412 472 546
50 40 30 40 52 60 74
MARGINAL COST
RELATIONSHIP OF MC TO AC
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