Cost Concepts

Cost
concepts
* Cost Concepts which are relevant to
business operations and decisions can be
based on 2 categories
* Concepts used for accounting purposes
* Analytical cost concepts
Opportunity
cost
• The opportunity cost may be defined as
the expected returns form the second best
use of the resources which foregone due
to the scarcity of resources. The
opportunity cost is also called alternative
cost. Had the resource available been
unlimited, there would be no opportunity
cost.
Actual
Costs
• Actual costs are those which are actually
incurred by the firm in payment for labor,
material, plant, building, etc.
Business costs and Full
Costs
• Business costs include all the payments
and contractual obligations made by the
firm together with the book of costs of
depreciation on plant and equipment

• Full Costs includes business costs,

opportunity cost and normal profit.
Explicit and Implicit
Costs
• Explicit costs are those which fall under
actual costs entered in the books of
accounts

• In contrast, there are costs that do not

take the form of cash outlays nor do they
appear in the accounting system. Such
costs are called Implicit or Imputed Costs.
Out of Pocket and Book
Costs
• The items of which involve cash payments, both
recurring and non-recurring, are known as out-
of-pocket costs

• There are certain actual business costs which do

not involve cash payments, but a provision is
made in the books of accounts and they are
taken into account while making the profit and
loss accounts. Such expenses are known as book
costs.
Fixed Costs and variable
costs
• Fixed costs are those which are fixed in
volume for a certain given output. Fixed
cost does not vary with variation in output
between zero and a certain given level of
output.

• Variable costs are those that vary with the

variation In total output
Total, average and Marginal
costs
• Total cost is the total expenditure incurred in the
production of goods and services

• Average cost is not actual cost. It is obtained by

dividing the total cost by the total output

• Marginal cost is the addition to the total cost on

account of producing one additional unit of
product.
Short Run and long run
costs
• Short run costs are costs that vary with variation
in output. Short run costs are the same as
variable costs

• Long run costs are costs that are incurred on

fixed assets like plant, machinery, etc

• It is to be noted that running costs and

depreciation of capital assets are included under
short run costs
Incremental and Sunk
Costs
• Incremental costs are closely related to marginal
costs but while marginal refers to the cost of
the marginal unit of output, incremental costs
refers to the total additional cost associated
with the expand in output

• Sunk Costs are those which cannot be altered,

increased or decreased by varying the rate of
output
Historical and replacement
cost
• Historical cost refers to the cost of an
asset acquired in the past.

• Replacement cost refers to the outlay

which has to be made for replacing an old
asset.
Private and Social
Costs
• Private costs are those which are actually
incurred or provided for by an individual or a
firm on the purchase of goods and services from
the market. For a firm, all actual costs both
explicit and Implicit are private costs.

• Social Costs refers to the total cost borne by the

society due to production of a commodity