ANALYSIS OF COST

PREPARED BY:
MD. SHARIF HASSAN
LECTURER, DBA, UAP
TOTAL COST: FIXED AND
VARIABLE
 Total cost represents the lowest total dollar expense needed to produce each level
of output. It is the combination of fixed cost and variable cost
 Fixed cost represents the total dollar expense that is paid out even when no output
is produced. Fixed cost is unaffected by any variation in the quantity of output.
 Variable cost represents expenses that vary with the level of output—such as raw
materials, wages, and fuel—and includes all costs that are not fixed.

Equation of Total Cost, TC = FC + VC

TC x q = q (FC + VC)
TOTAL COST: FIXED AND
VARIABLE
MARGINAL COST

 Marginal cost is one of the

most important concepts in
all of economics.
Marginal cost ( MC )
denotes the extra or
additional cost of
producing 1 extra unit of
output.
MARGINAL COST AND TOTAL COST
IN DIAGRAM
AVERAGE OR UNIT COST

Average cost ( AC ) is a concept widely used in business; by

comparing average cost with price or average revenue,
businesses can determine whether or not they are making a
profit. Average cost is the total cost divided by the total
number of units produced
AVERAGE FIXED AND VARIABLE
COSTS
 Average fixed cost ( AFC ) is defined as FC/q . Since total
fixed cost is a constant, dividing it by an increasing output
gives a steadily falling average fixed cost curve. In other
words, as a firm sells more output, it can spread its
overhead cost over more and more units.
 Average variable cost ( AVC ) equals variable cost
divided by output, or AVC VC/q .
AVERAGE FIXED AND VARIABLE
COSTS
THE RELATION BETWEEN
AVERAGE COST AND MARGINAL
COST
 When marginal cost is below
average cost, it is pulling
average cost down.
 When MC is above AC , it is
pulling up AC .
 When MC just equals AC, AC is
constant. At the bottom of a U-
shaped AC, MC= AC =
Minimum AC.
THE LINK BETWEEN
PRODUCTION
AND COSTS
DIMINISHING RETURNS AND U-
SHAPED COST CURVES
In the short run, when factors such as
capital are fixed, variable factors tend
to show an initial phase of increasing
marginal product followed by
diminishing marginal product. The
corresponding cost curves show an
initial phase of declining marginal
costs, followed by increasing MC after
diminishing returns have set in.
THE INCOME STATEMENT, OR
STATEMENT OF PROFIT AND LOSS
Net Income = Total Revenue- Total Expenses
THE BALANCE SHEET
Asset = Liabilities + Owner’s Equity (Net Worth)
OPPORTUNITY COSTS

Decisions have opportunity costs because choosing one thing

in a world of scarcity means giving up something else. The
opportunity cost is the value of the most valuable good or
service forgone.