cost concept.pptx

8/10/2019 Cost concept.pptx

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Cost concept

Prof. Prasad Joshi


2/15

Explicit & Implicit costs

Explicitcosts are costs that require a direct outlay of

money by the firms owner(s).

Implicitcosts are costs that do not require an outlay

of money by the firm

Prof. Prasad Joshi


3/15

Fixed and Variable Costs

Fixed cost is that cost which remains constant

up to a certain level of output.

It is not affected by the changes in the volume

of production.

When the production increases, fixed cost per

unit decreases.

Prof. Prasad Joshi


4/15

Variable cost varies directly with the variation

in output.

An increase in total output results in an

increase in total variable costs and decrease in

total output results in a proportionate decline

in the total variable costs.

The variable cost per unit will be constant.

Prof. Prasad Joshi


5/15

Short-Run and Long-Run Costs

Short-Runis a period during which the

physical capacity of the firm remains fixed.

Any increase in output during this period is

possible only by using the existing physical

capacity more intensively.

Prof. Prasad Joshi


6/15

Long-Runis a period during which it is

possible to change the firm's physical capacity.

All the inputs become variable in the long-

term.

Short-Runcostis that which varies with

output when the physical capacity remains

constant. Long-Runcostsare those which vary

with output when all the inputs are variable.

Prof. Prasad Joshi


7/15

Opportunity Costs and Outlay Costs

Outlay costs are those expenses which are

actually incurred by the firm.

These are the actual payments made for

labour, material, plant, etc.

Outlay cost is an accounting cost concept.

It is also called absolute cost or actual cost.

Prof. Prasad Joshi


8/15

The opportunity cost of any action is

measured by the value of the most favorable

alternative course which has to be foregone if

that action is taken.

Opportunity cost arises only when there is an

alternative.

If there is no alternative, opportunity cost is

the estimated earnings of the next best use

Prof. Prasad Joshi


9/15

Out-of-pocket and Book Costs

Out-of-pocket costs are those costs that

involve current cash payment.

Wages, rent, interest etc., are examples of

this.

The out-of-pocket costs are also called explicit

costs.

Book costs may be called implicit costs.

Prof. Prasad Joshi


10/15

Incremental and Sunk costs

Incremental cost is the additionalcost due to a

change in the level or nature of business activity.

The change may be caused by adding a new

product, adding new machinery, replacingmachinery by a better one etc.

Sunk costs do not alter when any change in

activity is made and are irrelevant to a decision

being taken now.

Investments in fixed assets are examples of sunk

costs.

Prof. Prasad Joshi


11/15

Replacement and Historical costs

Historical cost is the original cost of an asset.

Historical cost valuation shows the cost of an

asset as the original price paid for the asset

acquired in the past.

Replacement cost is the price that would have

to be paid currently to replace the same asset.

Prof. Prasad Joshi


12/15

Controllable and Non-controllable

costs

Controllable costs are the ones which can be

regulated by the executive who is in charge of

it.

The concept of controllability of cost varies

with levels of management.

Direct expenses like material, labour etc. are

controllable costs.

Prof. Prasad Joshi


13/15

Business and Full costs

A firm's business cost is the total money

expenses recorded in the books of accounts.

Full cost of a firm includes not only the

business costs but also opportunity costs of

the firm.

Prof. Prasad Joshi


14/15

Economic and Accounting Cost

Accounting costs are recorded with the intention

of preparing the balance sheet and p &lstatements which are intended for the legal,

financial and tax purposes of the company. The accounting concept is a historical concept.

Economic concept considers future costs and

future revenues which help future planning and

choice. When the accountant describes what hashappened, the economist aims at projecting what

will happen.

Prof. Prasad Joshi


15/15

Thank You

Prof. Prasad Joshi

cost concept.pptx

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