Accounting cost

Accounting cost is simply as money cost. Accounting cost accounts only the explicit cost incurred in
conducting business and not the implicit cost. The explicit costs include direct costs to the company such
as employee wages, raw material cost, transportation and storage cost

Economic cost

Economic cost includes implicit cost and explicit cost. Economic cost is concerned with that costs are
expected to the in the future and how the firm would be able to rearrange its resources to lower its
costs and improve its profitability

For example, consider a firm that owns building, therefore pays no rent for office space. Accounting cost
is zero, however, economy is cost is considered as the rent that the firm could have earned by leasing
the office space to another company

Social cost

Social cost is the cost to society of some particular operation. It includes private cost plus any eternal
cost

For example: if you smoke , the private cost is $3 for a packet of 20 cigarettes. But, there are also
external costs to society

Air pollution and risks of passive smoking

Litter form discarded cigarette butts

Health costs
As example of the above situation is useful here. Assume that a particular railroad incurs $5 million of
fixed costs on an annual basis. In addition, assume that the railroad is analyzing costs for pricing
purposes between Bellefonte, Pennsylvania, and Chicago . In its examination of cost, the railroad
determines that the variable cost on a carload is $250 between Bellefonte and Chicago

Although it might be unrealistic, assume that the railroad only moves 10 cars per year. The cost would
be as follows:

Fixed cost $5,000,000

Variable cost $2,500 ( 10 cars x $ 250 )

Total cost $ 5,002,500

Average cost $500,250 per car

If it moves 1,000 cars , the cost would be :

Fixed cost $5,000,000

Variable cost $250,000 ( 1,000 cars x $ 250 )

Total cost $ 5,250,000

Average cost $5,250 per car

If it moves 100,000 cars , the cost would be :

Fixed cost $5,000,000

Variable cost $25,000,000 ( 100,000 cars x $ 250 )

Total cost $ 30,000,000

Average cost $300 per car

The relationship is easy to see. If the number of cars increased in our example, the average cost would
continue to decline. Theoretically, average cost would have to level out and eventually increase
due to decreasing returns, but the important point is that the high proportion of fixed costs and
the large capacity cause the average cost to decline over a great range of output . There would
be a point, however, at which additional cars would require another investment in fixed cost,
thus shifting the average cost curve

The significance of the declining cost phenomenon to a railroad is that volume is a very important
determinant of cost and efficiency. Furthermore, pricing the service to