Managerial Economics - Cost Analysis
Types Of Costs - Cost Analysis
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There are various classifications of costs based on the nature and the purpose of calculation.
Types Of Costs
There are various classifications of costs based on the nature and the purpose of calculation. But in economics and for accounting purpose the following are the important cost concepts.
Actual cost/ Outlay cost/ Absolute cost / Accounting cost: The cost or expenditure which a firm incurs for producing or acquiring a good or service. (Eg. Raw material cost)
Opportunity cost: The revenue which could have been earned by employing that good or service in some other alternative uses. (Eg. A land owned by the firm does not pay rent. Thus a rent is an income forgone by not letting it out)
Sunk cost: Are retrospective (past) costs that have already been incurred and cannot be recovered.
Historical cost: The price paid for a plant originally at the time of purchase.
Replacement cost: The price that would have to be paid currently for acquiring the same plant.
Incremental cost: Is the addition to costs resulting from a change in the nature of level of business activity. Change in cost caused by a given managerial decision.
Explicit cost: Cost actually paid by the firm. If the factors of production are hired or rented then it is an explicit cost.
Implicit cost: If the factors of production are owned by a firm then its cost is implicit cost.
Book cost: Costs which do not involve any cash payments but a provision is made in the books of accounts in order to include them in the profit and loss account to take tax advantages.
Social cost: Total cost incurred by the society on account of production of a good or service.
Transaction cost: The cost associated with the exchange of goods and services.
Controllable cost: Costs which can be controllable by the executives are called as controllable cost.
Shut down cost: Cost incurred if the firm temporarily stops its operation. These can be saved by continuing business.
There are various classifications of costs based on the nature and the purpose of calculation. But in economics and for accounting purpose the following are the important cost concepts.
Actual cost/ Outlay cost/ Absolute cost / Accounting cost: The cost or expenditure which a firm incurs for producing or acquiring a good or service. (Eg. Raw material cost)
Opportunity cost: The revenue which could have been earned by employing that good or service in some other alternative uses. (Eg. A land owned by the firm does not pay rent. Thus a rent is an income forgone by not letting it out)
Sunk cost: Are retrospective (past) costs that have already been incurred and cannot be recovered.
Historical cost: The price paid for a plant originally at the time of purchase.
Replacement cost: The price that would have to be paid currently for acquiring the same plant.
Incremental cost: Is the addition to costs resulting from a change in the nature of level of business activity. Change in cost caused by a given managerial decision.
Explicit cost: Cost actually paid by the firm. If the factors of production are hired or rented then it is an explicit cost.
Implicit cost: If the factors of production are owned by a firm then its cost is implicit cost.
Book cost: Costs which do not involve any cash payments but a provision is made in the books of accounts in order to include them in the profit and loss account to take tax advantages.
Social cost: Total cost incurred by the society on account of production of a good or service.
Transaction cost: The cost associated with the exchange of goods and services.
Controllable cost: Costs which can be controllable by the executives are called as controllable cost.
Shut down cost: Cost incurred if the firm temporarily stops its operation. These can be saved by continuing business.
Economic
costs are related to future. They play
a vital role in business decisions
as the costs considered in decision - making are usually future costs. They are
similar in nature to that of incremental, imputed explicit and opportunity
costs.
Tags : Managerial Economics - Cost Analysis
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