Batch 12~14

PHM:Sem 1

Sub ~ Managerial Economics Topic~ Cost Concepts Presented By:Group No:5. 1225-Harish.K.V. 1226-Kedar Patankar. 1227-Kishor Patil. 1228-Krupa Kelkar. Click to edit Master subtitle style 1229-Y.Lakshman. 1230-M.Ravi Babu. Dt:23-10-12

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INTRODUCTION

Cost is normally considered from producers point of view . In producing a commodity , a firm has to employ an aggregate of various factors such as LAND. LABOUR. CAPITAL. ENTREPRENEURSHIP.

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REAL COST

Real cost of production refers to the physical quantities of products used in producing a commodity. It refers to the exertion of labour ,sacrifice involved in the abstinence from present consumption by the savers to supply capital , and social effects of pollution, congestion, and environmental distortions.

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OPPORTUNITY COST

Opportunity cost is the cost of a good or service as measured by the alternative uses that are foregone by producing the good or service.

If 15 bicycles could be produced with the materials used to produce an automobile, the opportunity cost of the automobile is 15 bicycles.

The price of a good or service often may reflect its opportunity cost.

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MONEY COST

Money Cost is the monetary expenditure on inputs of various kinds raw material , labour etc required for output. It is the payment made for the factors in terms of money. EXPLICIT IMPLICIT

There are two types of money cost

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EXPLICIT COST

Explicit cost refers to the actual money outlay of a firm to buy or hire the productive resources it needs in the process of production. Costs of raw material, Wages and salaries, Power charges, Rent of factory , interest payments of capital invested, insurance , taxes like property tax, duties , marketing , transport.

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IMPLICIT COST

Implicit costs are imputed payments which are not directly or actually paid out by the firm as no contractual disbursement is fixed for them. Implicit cost are not directly incurred by the firm through market transaction.

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Types of Cost
Total fixed costs (TFC) Average fixed costs (AFC) Total variable costs (TVC) Average variable cost (AVC) Total cost (TC) Average total cost (ATC) Click to edit Master subtitle style Marginal cost (MC)

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Short-Run & Long-Run

Short-run: One or more production input is fixed: Increasing cropland? One crop or livestock production cycle. Long-run:

The quantity of all necessary production inputs can be changed. Expand or acquire additional inputs.

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Fixed Costs(FC)
Fixed Cost denotes the costs which do not vary with the level of production. FC is independent of output. Result from owning a fixed input or resource. Incurred even if the resource isnt used. Dont change as the level of production changes (in the short run). Exist only in the short run. Click to edit Master subtitle style The only way to avoid fixed costs is to sell the item.

Eg: Depreciation, Interest Rate, Rent, Taxes

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Total fixed cost (TFC)

All costs associated with the fixed input. Average fixed cost per unit of output: AFC = TFC /Output
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Variable Costs(VC)
Variable Costs is the rest of total cost, the part that varies as you produce more or less. It depends on Output. Variable costs will increase as production increases. Total Variable cost (TVC) is the summation of the individual variable costs. VC = (the quantity of the input) X (the inputs price).

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Variable costs exist in the short-run and long-run:

In fact, all costs are considered to be variable costs in the long run.

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Variable versus Fixed, some examples:

Fertilizer is a variable cost until it has been purchased and applied. Labor and cash rent contracts have to be considered fixed costs during the duration of the contract. Irrigation water is generally variable, but can have a fixed component. Eg: Increase of output with labour. All costs associated with the variable input. Average variable cost- cost per unit of output:

Total variable cost (TVC):

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AVC = TVC/ Output

Total costs(TC)
The sum of total fixed costs and total variable costs. TC = TFC + TVC

Average Total Cost:

Average total cost per unit of output. ATC =AFC + AVC

ATC = TC/ Output

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Marginal Costs
The additional cost incurred from producing an additional unit of output:

MC = TC Output
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Eg: If A is starting business of Engineering works.

No of TFC units Produced 0 1000 2000 3000 4000 5000 1000 1000 1000 1000 1000 1000 TVC TC AFC AVC ATC

0 1000 1800 2600 3500 5000

1000 2000 2800 3600 4500 6000

0 1.00 0.50 0.33 0.25 0.20

0 1.00 0.90 0.87 0.88 1.00

0 2.00 1.40 1.20 1.13 1.20

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Typical Total Cost Curves

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TVC,TC is always increasing.

First at a decreasing rate. Then at an increasing rate

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Typical Total Cost Curves

TFC is constant and unaffected by output level. TVC is always increasing:

First at a decreasing rate. Then at an increasing rate.

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Typical Average & Marginal Cost Curves

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EXAMPLE
NO OF UNITS 0 1 2 3 4 5 TFC 15 15 15 15 15 15 TVC 5 9 12 16 25 TC 15 20 24 27 31 40 AFC 15 7.5 5 3.75 3 AVC 0 5 4.5 4 4 5 AC 20 12 9 7.75 8 MC 5 4 3 4 9

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Typical Average & Marginal Cost Curves

AFC is always declining at a decreasing rate.

MC is generally

ATC and AVC decline at increasing. first, reach a minimum, then increase at higher MC crosses ATC and AVC at levels of output. their minimum point. The difference between ATC and AVC is equal to AFC.

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Conclusion
To understand meaning of different costing terms. To understand different costing methods. To understand meaning of cost sheet & techniques. Cost concept is importance for decision making. Such as two importance decisions made by managers A)Whether to produce or not. B)How much to produce. Click to edit Master subtitle style

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THANK YOU

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