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Cost Analysis

Cost Analysis

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Published by: 8928 on May 03, 2009
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09/20/2010

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COST ANALYSIS
CONCEPT OF COST OF PRODUCTION
1.The
Cost Of Production Theory Of Value
is the theory that the price of anobject or condition is determined by the sum of the cost of the resources thatwent into making it.2.The cost can compose any of the factors of production (including labor,capital, or land) and taxation.3.Production costs are those which must be received by resource owners in orderto assume that they will continue to supply
TYPES OF ECONOMIC COSTS
1.
 Accounting Cost.
Actual expenses plus depreciation.2.
Economic Cost
. Cost to a firm of using resources in production. Also calledopportunity cost, the most valuable forgone alternative
1. EXPLICIT COST
1.Also called
 Money Cost
or
 Accounting Cost
2.A cost that is represented by lost opportunity in actual cash payments.3.It is the cost of factors of production and/or services that entrepreneur has tobuy directly.4.It includes
Wages, Salary, Expenses Of Factors Of Production, Fuel, Advertisement, Transportation Taxes
and
Depreciation Charges
.
 
2. IMPLICIT COST
1.A cost that is represented by lost opportunity in the use of a company's ownresources, excluding cash2.For example, the time and effort that an owner puts into the maintenance of the company rather than working on expansion3.The implicit cost begins and ends with foregoing the benefits and satisfaction4.
Opportunity Cost Without Payment Or Transaction:
an opportunity cost forwhich no payment is made nor any asset value reduced
Explicit Cost Vs. Implicit Cost
1.Explicit cost can be counted in terms of money whereas implicit cost can notbe traded and therefore can not be counted in terms of money.2.Explicit cost is a direct tangible cost whereas implicit cost is indirectintangible cost.
4. NOMINAL COST
1.Nominal Cost is the money cost of production. It is also called
Expenses Of Production
2.Producer must make sure that he covers expenses of factors of production inproducing the good in long term.
5. REAL COST
1.Also called
Opportunity Cost
2.The cost of an opportunity forgone (and the loss of the benefits that could bereceived from that opportunity); the most valuable forgone alternative.3.The value of the next best alternative foregone as the result of making adecision. Opportunity cost analysis is an important part of a company'sdecision-making processes but is not treated as an actual cost in any financialstatement.4.
 Money Cost
and
Real Cost
do not coincide
 
PROFIT
ACCOUNTING PROFIT
1.Accounting profit is the difference between price and the costs of bringing tomarket whatever it is that is accounted as an enterprise (whether by harvest,extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses.2.The difference between a business's revenue and it's accounting expenses.3.A business is said to be making an accounting profit if its revenues exceed theaccounting cost of the firm.
ECONOMIC PROFIT
1.
Economic Profit
is the difference between a company's
Total Revenue
and its
Opportunity Costs
.2.It is the increase in wealth that an investor has from making an investment,taking into consideration all costs associated with that investment includingthe opportunity cost of capital.3.The value that remains after all costs, including the opportunity costs of theoperator’s labor and capital, have been subtracted from gross income. Sameas the return to management.4.An economic profit arises when revenue exceeds the opportunity cost of inputs, noting that these costs include the cost of equity capital that is met by"normal profits."
Normal Profit
1.Normal profit is a component of the firm's opportunity costs.2.The time that the owner spends running the firm could be spent on runninganother firm.3.The return the entrepreneur can expect to earn or the profit that the businessowners considers necessary to make running the business worth his/her while

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