Cost concept

Prof. Prasad Joshi

Explicit & Implicit costs

Explicit costs are costs that require a direct outlay of
money by the firms owner(s).
Implicit costs are costs that do not require an outlay
of money by the firm

Prof. Prasad Joshi

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

 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

Short-Run and Long-Run Costs

Short-Run is 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

 Long-Run is a period during which it is

possible to change the firm's physical capacity.
All the inputs become variable in the longterm.
Short-Run cost is that which varies with
output when the physical capacity remains
constant. Long-Run costs are those which vary
with output when all the inputs are variable.
Prof. Prasad Joshi

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

 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

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

Incremental and Sunk costs

Incremental cost is the additional cost 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, replacing
machinery 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

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

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

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

Economic and Accounting Cost

Accounting costs are recorded with the intention
of preparing the balance sheet and p &l
statements 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 has
happened, the economist aims at projecting what
will happen.
Prof. Prasad Joshi

Thank You
Prof. Prasad Joshi