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Costs

Costs

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Published by brijpatel909

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Categories:Types, Business/Law
Published by: brijpatel909 on Aug 22, 2010
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05/04/2013

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Significance
The burden sustained in order to perform a certain activity,to carry out a certain production, to achieve certain goals.In a balance sheet, costs raise commercial liabilities to besettled. They should not be confused with money outflows.By contrast, in economics, most formal models ignore thisdistinction between costs and payments.
Cost categoriesActual costs
refer to real transactions, wherease
opportunity costs
refer to the alternative taken intoconsideration by decision makers who might want tochoose the line of activity which minimise the costs. Froman external point of view, it is difficult to ascertain whichare the alternative considered.
Discretionary costs
are not strictly necessary for currentproduction but correspond to strategic goals (e.g.improving the firm's image through anadvertising institutional campaing).
Production costs
Given a specificproduct version, production costs areusually classified according to their responsiveness todifferent levels of production attained.
Fixed costs
are simply not responsive to production levels.If there are only fixed costs, the total costs follow this rule:For instance, the cost of renting an office is a fixed cost,
 
since usually the contract fixes it for a certain period of time (say one year), without any reference to the incomeproduced by the operations that take place in the sameoffice.The firm deciding to rent this office, however, will haveusually expected to be able to afford it as well as to bereasonably sure that it will not be too small for the kind of operation it intends to carry out.This brings us to an important conclusion: a very commonsituation is that of 
quasi-fixed costs
. They are flat in acertain range of (expected) production but they are forcedto jump to higher levels if certain thresholds are overcome.Near these thresholds, in fact, quality deterioration of output and other negative phenomena take place.Symmetrically, below other minimum thresholds in level of activities, the same costs become unaffordable and willprobably be reduced. Here you have the graph of totalcosts when there are only quasi-fixed costs:
Variable costs
grow with higher levels of production(proportionally or not). If there are only variable costs, atzero production the total costs will be zero. Total costs willfollow for instance this rule:

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