Introduction to Cost Concept
Definition: Cost refers to the expenditure incurred in the production of goods and
services.
* Importance
Helps in pricing decisions.
Guides budgeting and financial planning.
Essential for profit analysis
* Visuals: Flowchart showing the role of cost in production and pricing.
Types of Cost Concepts
1.Fixed Cost
2.Variable Cost
3.Total Cost
4.Average Cost
5.Marginal Cost
6.Opportunity Cost
7.Sunk Cost
Fixed Cost
• Definition: Costs that do not change with the level of output (e.g., rent,
salaries).
• Example: Factory rent remains constant regardless of producti
Variable Cost
• Costs that vary directly with the level of production (e.g., raw materials,
labor).
• Example: Cost of raw materials increases as production rises.
TOTAL COST
• Definition: Sum of fixed and variable costs at any level of output.
• Formula: TC = FC + VC
Average Cost
• Definition: Cost per unit of output.
• Formula: AC = TC / QExample: If TC is $500 and output is 100 units, AC =
$5/unit.
Marginal Cost
• Definition: Additional cost of producing one more unit of output.
• Formula: MC = ΔTC / ΔQ
• Importance: Guides decision-making for incremental production.
Opportunity Cost
• Definition: The cost of forgoing the next best alternative when making a
decision.
• Example: Choosing to invest in Project A over Project B.
Sunk Cost
• Definition: Costs that have already been incurred and cannot be
recovered.
• Example: Money spent on market research.
• Importance: Should not influence future decisions.