Types of Cost… Fixed Cost… Average fixed cost › Economics Basics
Basic Principles of Economics, Market Structures and Cost Analysis
Basic Principles of Economics:
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Types of Cost
Actual cost (outlay cost or acquisition cost or absolute cost):• cost which is incurred by the firm while producing the goods. eg: cost of raw material, labour, power
sunk cost:
implicit cost or imputed cost:
(cost that is implied but not reflected in the financial reports of the firm). Cost which belong to owners or to the owners himself. Cost which does not include cash payments to the outsiders, it will remain in the form but showed as cost to the firm Eg: Rent on own building, interest on own capital.
Explicit or paid out cost:
Cost which are actually paid by firm to the outsiders. Expense that is contractual in nature and definite in amount, such as rent, salaries, wages
Book Cost:
Cost which does not require any cash payments to the outsiders, but is treated as cost to the firm. Eg: Depreciation on assets.
Economic cost or future cost:
These costs relate to the future. Expected to be incurred in some future period Eg: Cost may incur by introduction of new products in future or expansions of firm
Social cost:
Cost which is happened for the aspects like pollution control, cleaning purpose, cost incurred for the welfare of the people.
Indirect Cost:
Cost which are not easily traceable in the production process Eg: Wastage of Raw material, Electricity bills.
Controllable Cost:
Cost which can control eg: Usage of raw material, Human Resources.
Uncontrollable Cost:
Cost which cannot be control eg: Obsolescence of machinery, repairs of the machinery.
Original or Historical Cost:
Cost of equipment at the time of purchase.
Replacement Cost:
The Cost incurred for replacing the new machinery in the place of old machinery in the firm.
Abandonment Cost:
Cost incurred for disposal of asset or machinery is called abandonment Cost.
Shutdown Cost:
Cost which would be incurred in the event of suspension of plant. eg: Storage of plant or machinery, construction of buildings, training the employees.
Urgent Cost:
Must be incurred so that the production goes on. eg: Raw material cost fuel, power and wages for the labour.
Postpone able Cost:
Cost whose postponement does not effect at least for some time on the firm and on production process and this coast can be paid after sometime. eg: Transportation charges, rent, interest.
Business Cost:
Payment of the taxes.
Out of stock Cost:
Loss of sale by shortage of goods in the market.
Fixed Cost:
Cost which does not change when there is change in the production. It remains constant. eg: Rent of the building, interest on capital, salaries, and wages.
Variable cost:
Cost which changes in accordance with production change. Eg: Raw material, power, fuel.
Average Cost:
Cost incurred for single unit of production in the total production.
Marginal Cost:
Additional cost incurred by the firm by producing one more units extra.
Long run Cost:
Cost incurred for the expansion of plant, for increase in the production of goods.
Short run Cost:
Cost incurred for the production of extra units with the existing plant capacity without purchasing new machinery.
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Fixed Cost
The much we produce the goods, fixed cost will not change, it will be constant (not change). If we close the production also fixed cost must be faced by the firm. eg: (Rent, salaries, Interest on capital) these are to paid by the firm, if there is production are not. Illustration:-Cost schedule table
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Average fixed cost
Fixed cost spends towards single unit of output or production is called Average fixed cost.
Total fixed cost (Rent) TFC = 1000/- No. of units produced TQ = 1000 The more he produces, per unit cost will be decreased [per unit cost of fixed cost is average fixed cost]
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Variable Cost
The cost which rises with increase in production and decreases with fall in production is called variable cost. Variable cost incur for total goods produced is called total variable cost. Eg: Raw materials, power, fuel and labour. The more the firm produces the goods the firm should incur more.
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Average variable Cost
Variable cost spent on single unit on goods is called Average variable Cost. By dividing the total variable cost with number of units of production we get Average Variable Cost.
Per unit variable cost on production is called Average Variable Cost.
It is common when production is raised, variable cost (raw material & electricity) per unit will come down. Then after certain limit again the cost per unit will raise. The reason behind this situation is as follows. More the raw material is purchased to raise the production, the cost will be charged low by the supplier. But in the case of the power more the production the cost of the power will be raise by slab rate. When these two variable cost power and raw material combines together, cost will be coming down to certain limit, the cost raises gradually.
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Total Cost
Total cost includes [Total Cost = total fixed cost + Total Variable cost]
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Average total cost (ATC)
[Per Unit total cost of production is called Average total cost]
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Marginal Cost (MC)
Marginal Cost is the additional cost incurred by producing one more unit extra.