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.
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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