COST ANALYSIS

PRE SE NTE D BY:

MALE E HA FATIMA

E SHA WAHE E D

NOUMAN BAIG

MAZE N AZE E M
WHAT IS COST
ANALYSIS?
In economics, the Cost Analysis refers
to the measure of the cost – output
relationship, i.e. the economists are
concerned with determining the cost
incurred in hiring the inputs and how
well these can be re-arranged to
increase the productivity (output) of
the firm.
In other words, the cost analysis is
concerned with determining money
value of inputs (labor, raw material),
called as the overall cost of production
which helps in deciding the optimum
level of production.
 CONCEPTS
1. Cost Concepts Used for Accounting
Purposes

2. Analytical Cost Concepts Used for Economic

Analysis of Business Activities:
 Cost Concepts Used
for Accounting
Purposes
Opportunity Cost:

The Opportunity Cost refers to the expected

returns from the second-best alternative use of
resources that are foregone due to the scarcity
of resources such as land, labor, capital, etc.

• Business Cost:

The Business Cost includes all the costs (fixed,

variable, direct, indirect) incurred in carrying
out the operations of the business.

• Full Cost
The Full Cost is the total cost incurred in
production and is comprised of business cost,
opportunity cost, and normal profit.
• Explicit Cost:
The Explicit cost, also called as Actual Cost is the
cost actually incurred by the firm for making all
the physical payments and the contractual
obligations. The physical payments include the
cost of material, labor, plant, equipment,
building, technology, advertisement, etc.
Book Cost:
The Book Cost refers to those expenses which do not involve actual
cash payments, but rather the provisions are made in the books of
accounts to include them in the profit and loss accounts and avail the
tax advantages
Implicit Cost:
The Implicit Cost, also called as Imputed Cost is the implied cost that does
not take a form of cash outlay, and neither is recorded in the books of
accounts.
Out-of-Pocket Cost
The Out-of-Pocket Cost involves the potential future cash payments or
cash transfers both recurring and non-recurring, paid during the current
accounting period or during the project. In other words, the out-of-pocket
cost involves the direct monetary payment for the work done during the
project.
 Analytical Cost Concepts Used for Economic Analysis of
Business Activities:
• Fixed Cost:

The Fixed Cost is the cost that remains fixed for

a certain volume of output. In other words, the
cost that does not change with the change in
the output or sales revenue, i.e. it remains fixed
irrespective of the volume of output is called
the fixed cost.

Variable Cost:
The Variable cost is the cost proportionally
related to the level of output, i.e. it increases
with the increase in the production and
contracts with the decrease in the total output.
Simply, the cost which varies with the change in
the total output is called the variable cost.
• Total Cost:

It is the actual cost incurred in the production

of a given level of output. In other words, the
total expenses (cost) incurred, both explicit and
implicit, on the resources to obtain a certain
level of output is called the total cost.

• Average Cost:

The Average Cost is the per unit cost of

production obtained by dividing the total cost
(TC) by the total output (Q). By per unit cost of
production, we mean that all the fixed and
variable cost is taken into the consideration for
calculating the average cost. Thus, it is also
called as Per Unit Total Cost.
Marginal Cost:

The Marginal Cost refers to the change in the

total cost as a result of the production of one
more unit of the product. In other words, the
marginal cost is the increase or decrease in the
total cost due to the production of one
additional unit of the product.

Incremental Cost

The Incremental Cost refers to the additional

cost that a company incurs in undertaking
certain actions such as expanding the level of
production or adding a new variety of product
to the product line, etc.
 Sunk Cost
• Short-run Cost:
A Sunk Cost is the cost already incurred by the firm and cannot be
The Short-run Cost is the cost which has short- recovered or refunded.
term implications in the production process, i.e.
these are used over a short range of output.

• Long-Run Cost
The Long-run Cost is the cost having the long-
term implications in the production process, i.e.
these are spread over the long range of output.
Historical Cost:
The assets and liabilities recorded in the balance sheet with its original
acquisition cost, the i.e. amount spent at the time of its acquisition are
called as the Historical Cost.

• Private Cost:
The Private Cost is the cost related to the working
of the firm and is used in the cost-benefit analysis
of the business decisions. These costs are borne Replacement Cost:
by the firm itself.
The Replacement Cost is the cash outlay that firm has to pay in order to
replace an old asset at the current market price. Simply, the amount paid
• Social Cost: to replace the existing property with the new one having the similar utility,
without considering the depreciation constitutes the replacement costs.
The Social Cost is the cost related to the working
of the firm but is not explicitly borne by the firm
instead it is the cost to the society due to the
production of a commodity.
Cost-Output
Relationship:
• SHORT RUN

• LONG RUN
 Cost-Output Relationship in the Short-Run:
Units of Total Total Total Average Average Average Marginal
Output fixed variable cost (TFC variable fixed cost cost (TC/Q) cost
cost cost TVC + TVC) cost (TVC / (TFC / Q) (TFC/Q)
Q)

1 60 20 80 20 60 80 20

2 60 36 96 18 30 48 16

3 60 48 108 16 20 36 12

4 60 64 124 16 15 31 16

5 60 90 150 18 12 30 26

6 60 132 192 22 10 32 42
The short-run cost-output relationship can be shown graphically as follows.
Cost-output Relationship in the Long-Run: