Wednesday, 6 November 2019

Unit 8: Cost Analysis


                                                            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.

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