 Change in overall cost that result from

particular decision.
 It include both fixed cost and variable cost.
 In the short period, incremental cost consist of
variable cost.
 Eg. Cost of additional labour, additional raw
material, power, fuel, etc - which is the result
of a new decision being taken by the firm.
 Sunk Cost is one which is not affected or
altered by a change in the level or nature of
business activity.
 It will remain the same whatever the level of
activity.
 Eg. Depreciation
 Out – of – Pocket cost are those that involve
immediate payments to outsiders.
 Eg. Wages and salaries paid to the
employees
 Book cost opposed to out of pocket cost.
 Book cost that do not require current cash
expenditure .
 E.g.Salary for the owner
 Cost that the firm would have to incur if it
wants to replace or acquire same asset now.
 Eg. If the price of bronze at the time of
purchase, say in 1974, was Rs 15 Kg and if
the present price is Rs 18 kg. here the
replacement cost is Rs 18
 Historical cost of an asset status the cost of
plant, equipment and materials at the price
paid originally for them.
 For eg. If the price of bronze at the time of
purchase, say in 1974, was Rs 15 Kg and if
the present price is Rs 18 kg. here the
Historical cost is Rs 15
 Explicit costs are those expenses which are
actually paid by the firm (paid out cost)
 These costs are appear in the accounting
records of the firm
 Implicit cost are theoretical costs in the sense
that they go unrecognized by the accounting
system
 Actual expenditure incurred for acquiring or
producing a good or service.
 These costs are the costs that are generally
recorded in book of accounts.
 Eg. Actual wages paid, cost of material
purchased, interest paid, etc.,
 Direct Cost – the cost can easily traceble.
 Example for Direct cost – cost of raw
material
 Indirect cost – the cost cannot be traceble
 Shut down cost are required to be incurred
when the production operations are suspended
and will not be necessary if the production
operations continue.
 Eg. If the production is suspended
temporarily, the plant, machinery or
equipment will have to be protected by putting
up sheds, using taurpaulin, plastic sheets, etc.,
 When any plant is to be permanently closed
down, some costs are to be incurred for
disposing off the fixed assets
 Fixed Cost – Fixed cost are those which are
incurred in the facors of production whose
amount cannot be altered in the short run.
 Eg. Building
 Variable cost – variable cost on those costs
which are incurred on the employment of
variable factors of production whose amount
can be altered in the short run & long run.
 Eg. Labour, raw material
 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 material, etc.,
 Fixed cost remains unchanged while variable
cost fluctuate with output
 It is the period of time in which the quantities
of all factors may be varied .
 All factors variable in the long run
 There is no fixed input and therefore no fixed
cost i.e all costs are variable
 Total cost include all cash payments made to
hired factors of production and all cash
charges imputed for the use of the owners
factors of production in acquiring or
producing a good or service.
 Total cost of the firm is the sum total of
Explicit cost and implicit cost expenditures
incurred for producing a given level of output
 Example: A shoe maker’s cost will include:
The amount he spends on leather
The amount spends on thread
Rent for the workshop
Salary and wages for the labour
Interest on borrowed capital
Own fund interested in the business
 Cost per unit of the output
 AC = Dividing the total cost by the total
quantity produced
Total Cost
AC =
Total quantity produced
 Marginal cost is the extra cost of producing one
additional unit
 At a given level of output, one examines the
additional costs being incurred in producing one
extra unit and this yields the marginal cost.
 Eg. If the total cost of a firm is Rs 5000 when it
produces 10 units of a good but when 11th unit of a
good produced, it increases to Rs 5300. hence the
marginal cost of 11th unit is Rs 300
Units of goods Total Cost (TC) Average Cost (AC) Marginal Cost
produced 2 3 = 2/1 (MC)
1 4
10 5000 500 -
11 5300 481.82 300
12 5550 462.5 250
13 5700 438.46 150
14 5950 425 250
15 6350 423.33 400
 Average fixed Cost is the total fixed cost
divided by the number of units of output
produced.
Total Fixed Cost (TFC)
 AFC =
No of Units of output produced (Q)
 Average Variable cost (AVC) is the total
variable cost divided by the number of units
of output produced.
 AVC is the variable cost per unit of output
Total Variable Cost
 AVC =
No of units of output produced