Unit 8: Cost Analysis
Costs
enter into almost every business decision and it is important to use the right
analysis of cost.
Different
business problems call for different kinds of costs such as future and past
costs, incremental and sunk cost, out of pocket and book costs, replacement and
historical costa etc.
Fixed
costs are those costs which do not very with the change in the level of output
in the short run.
Variable
costs change with output levels.
The
short run is a period of time in which the output can be increased or decreased
by changing only the amount of variable factors such as labour, raw materials,
chemicals, etc.
Long
run, on the other hand, is defined as the period of time in which the
quantities of all factors may be varied.
There
are short run average fixed cost and variable cost as well as long run average
costs.
Total
cost is the sum of total of the explicit plus implicit expenditure.
Average
cost is the cost per unit of output.
Marginal
cost is the extra cost of producing one additional unit.
Economies
of scope are reductions in average costs attributable to an increase in the
number of goods produced.
Abandonment
costs: Costs incurred for disposing of the fixed assets, when any plant is to
be permanently closed down.
Book
costs: Costs that do not require current cash expenditure.
Direct
costs: Costs which can be directly attributed to the production of a unit of a
given product.
Explicit
costs: Expenses which are actually paid by the firm (paid-out-costs).
Implicit
costs: Theoretical costs which go unrecognized by the accounting system.
Incremental
costs: Costs that are defined as the change in overall costs that result from
particular Notes decision being made.
Indirect
costs: Costs which cannot be separated and clearly attributed to individual
units of production.
Opportunity
costs: The return from the second best use of the firm's resources which the
firm forgoes in order to avail itself of the return from the best use of the
resources.
Shut-down
costs: Costs incurred when the production operations are suspended and will not
be incurred, if the production operations continue.
Sunk
costs: Costs that are not affected or altered by a change in the level or
nature of business activity.
Variable
costs: Costs which are incurred on the employment of variable factors of
production whose amount can be altered in the short-run.
