Cost Concepts:


Cost Concepts: Cost may include price to be paid for a good, its transportation, storage and approach expenses besides other miscellaneous outflows. Since different decisions are affected by distinct types of costs. In order to ascertain the relevant cost to be analyzed for a particular situation, we need to discuss the various possible cost concepts in detail.

cost concepts

1.Actual Cost and Opportunity Cost

Costs that are actually incurred in acquiring or producing a good or service are known as Actual costs. Since these costs are real cash outflows and are usually recorded in the account books, they are also termed Accounting Costs.

Opportunity Cost is the notional cost of sacrificing the alternatives. It is the value of a benefit sacrificed in support of an alternative course of action.

2. Fixed Cost and Variable Cost

Fixed Cost is defined as the costs that remain constant with respect to the output. They might exist even if no output is produced.

On the other hand, Costs that vary with the changes in output are known as Variable Costs.

3. Explicit Cost and Implicit Costs

Explicit costs are out of pocket costs for which cash payment is made. There are some costs that don't involve a cash outlay, these costs are known as Implicit Costs.

cost concepts

4.Total Costs, Average Costs, and Marginal Costs

The amount total of all the costs: fixed, variable, explicit and implicit for the entire output, is known as Total Cost.

Average Cost is the cost per unit of output and is measured by dividing the total cost by the number of units produced.

Marginal Cost is the difference in total cost due to the production of one additional unit of output.

5. Short-run costs and Long-run Costs

Short-run is a period through which one or more inputs of the firm are fixed. A short-run cost is a cost that varies with the output when plant and equipment remain the same.

All the factors inputs are variable in the long-run period. Long-run cost is the cost that changes with the output when all the factors inputs change.

6. Accounting Costs and Economic Costs

Costs that are recorded in the books of account and are applied for accounting, auditing, and financial control and are known as Accounting Costs.

On the other hand, costs that help in managerial decision-making for managing the economic objectives of a firm are called Economic Costs.


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Vansh Dhingra

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