management studies

TOPIC – THEORY OF COST

SUBJECT – MANAGERIAL ECONOMICS
GUIDED BY- SUBMITTED BY-
Dr. Mrs. B. B. Pandey Amartya Tiwari
Asst. Professor Manish Nayak
GGV, Bilaspur Sana Fatima
Yashwant Jaiswal
MBA 1ST Semester
conten

tsINTRODUCTION
 MEANING OF COST
 DEFINITION OF COST
 EXPLICIT COST & IMPLICIT COST
 DIFFERENCE BETWEEN EXPLICIT & IMPLICIT
 COST FUNCTION
 OPPOUTUNITY COST
 TYPES OF COST
 MONEY COST
 REAL COST
 PRIVATE COST
 SOCIAL COST
 SHORT RUN COST FIXED COST
 TOTAL COST
 RELATIONSHIP BETWEEN TOTAL FIXED COST &
VARIABLE
 AVERAGE COST
 DEFINITION
 AVERAGE VARIABLE
 MARGINAL COST
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 INTRODUCTIO
N
The firm’s costs determine its supply. Supply along with
demand determines price. To under­stand the process of
price determination and the forces behind supply, we must
understand the nature of costs. We study some important
concepts of costs, and traditional and modern theories of
cost.

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 COST
A cost is an expenditure required to produce or sell a product or get an
asset ready for normal use. In other words, it’s the amount paid to
manufacture a product, purchase inventory, sell merchandise, or get
equipment ready to use in a business process.

There are many different costs, including fixed and variable, but they are
all accounted for in the same way. Costs are recorded as expenses on
the income statement during and accounting period and cleared out in
a closing entry at the end of the period.

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 G OF
COST
cost, in common usage, the monetary value of goods and services that
producers and consumers purchase. In a basic economic sense, cost is the
measure of the alternative opportunities foregone in the choice of one good
or activity over others.

 cost has to do with the relationship between the value of production inputs
and the level of output. Total cost refers to the total expense incurred in
reaching a particular level of output; if such total cost is divided by the
quantity produced, average or unit cost is obtained.
 EXPLICIT
COST
Explicit costs—also known as accounting costs—are easy to identify and link to a
company's business activities to which the expenses are attributed. They are
recorded in a company's general ledger and flow through to the expenses listed
on the income statement. The net income (NI) of a business reflects the residual
income that remains after all explicit costs have been paid. Explicit costs are the
only accounting costs that are necessary to calculate a profit, as they have a clear
impact on a company's bottom line. The explicit-cost metric is especially helpful
for companies' long-term strategic planning.
 IMPLICIT
COST
An implicit cost is any cost that has already occurred but not necessarily shown
or reported as a separate expense. It represents an opportunity cost that
arises when a company uses internal resources toward a project without any
explicit compensation for the utilization of resources. This means when a
company allocates its resources, it always forgoes the ability to earn money
off the use of the resources elsewhere, so there's no exchange of cash. Put
simply, an implicit cost comes from the use of an asset, rather than renting or
buying it.
 DIFFERENCE BETWEEN IMPLICIT &
EXPILICIT
Explicit costs, involve tangible assets and monetary transactions and result in real business
opportunities. Explicit costs are easy to identify, record, and audit because of their paper
trail. Expenses relating to advertising, supplies, utilities, inventory, and purchased
equipment are examples of explicit costs. Although the depreciation of an asset is not an
activity that can be tangibly traced, depreciation expense is an explicit cost because it
relates to the cost of the underlying asset owned by the company.

 Implicit or implied costs are not clearly defined, identified, or reported as expenses. They
often deal with intangibles and are described as opportunity costs—the value of the best
alternative not accepted. An example of an implicit cost is time spent on one activity of a
business that could better be spent on a different pursuit. Management will utilize explicit
costs when reviewing a business's operations, including profits; but will calculate implicit
costs only for decision-making or choosing between
9 multiple alternatives.
 FUNCTION
Management uses this model to run different production scenarios and
help predict what the total cost would be to produce a product at different
levels of output.
Understanding a firm’s cost function is helpful in the budgeting process
 because it helps management understand the cost behavior of a
product. This is vital to anticipate costs that will be incurred in the next
operating period at the planned activity level. Also, this allows
management to evaluate how efficiently the production process was at
the end of the operating period.
  OPPORTUNITY COST

Opportunity costs represent the potential benefits that an individual, investor, or

business misses out on when choosing one alternative over another. Because
opportunity costs are unseen by definition, they can be easily overlooked.
Understanding the potential missed opportunities when a business or individual
chooses one investment over another allows for better decision making.
Opportunity cost is often overlooked by investors. In essence, it refers to the hidden
cost associated with not taking an alternative course of action. If, for example, a
company pursues a particular business strategy without first considering the merits of
alternative strategies available to them, they might fail to appreciate their opportunity
costs and the possibility that they could have done even better had they chosen
another path.

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 Assumptions of Opportunity Costs:

• Perfect competition and full employment prevail

in the economy.

• Factors of production are fixed.

• Only-two goods can be produced in the economy.

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 COST
 Fixed Costs (FC)
 Variable Costs (VC)
 Semi-Variable Cost
 Marginal Costs
 Opportunity Cost 
 Economic Cost
 Accounting Costs
 Avoidable Costs
 SUCK COSTS
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 COST
Money cost is the actual cash cost incurred in the production
and sale of marketable goods or services. Money cost is a
summation of several costs that result in a cash outflow for the
business. 

For an entity, the entire range of actual costs from the price of raw
material purchased for production to legal costs incurred for
registering its patents, everything that has to be paid for is referred
to as money cost.

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Opportunity cost vs money cost
• Business establishments, especially manufacturing and service industries, utilize and apply
resources to produce marketable goods and services.

• In doing so, several costs are incurred that may be notional and actual costs or 
implicit and explicit costs. As the intention of business activity is to earn real profits, it is
essential that all costs involved are determined and taken into consideration.

• This serves several purposes such as decision making, pricing, cost control and management etc.
The first step to calculate costs is to categorize the various types of costs that may be incurred
while carrying out business activities.

• This article looks at meaning of and differences between two cost categories – opportunity cost
 and money cost.
 COST
Real costs, or true costs, reflect the negative and positive societal effects of
producing an item. Another word for these effects is "externalities."
Businesses rarely consider the externalities throughout the production
process they only think about the costs that directly affect them (fixed and
variable expenses). For example, a club owner may only be interested in
providing good music for their customers, without thinking about the
negative effects of the noise on neighbors. In such a scenario, the real costs
include the neighbor's medical bills in case the noise affects their hearing.
For this reason, the government often intervenes to make sure that businesses
don't disrupt others.
 MONEY
COST
 Depreciation and obsolescence
charges.
 Power fuel charges.
 Wages and salaries.
 Cost of machinery, raw material etc.

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 COST
True cost is an economic model that includes the cost of negative externalities
associated with goods and services.
If the prices of goods and services do not include the cost of negative externalities or
the cost of harmful effects they have on the environment, people might misuse
them and use them in large quantities without thinking about their ill effects on
the environment. Therefore, environmentalists support true cost economics to
counter the impact of negative externalities.

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 real cost

 The cost which taxpayers and government

health care facilities pay for taking care of
drug consumers.

 Real costs would include, but not be limited

to, production, market analysis, distribution,
and advertising.

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 private cost
The Private Cost is the cost related to the working
of the firm and is used in the cost-benefit analysis
of the business decisions. These costs are borne by
the firm itself.
The private cost is the actual cost incurred in
performing the day to day operations of the
business, such as the cost involved in the
production and consumption of the product.
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 private cost
 Transporting finished goods from the factory to the
consumer.

 The cost of labor engaged in direct production.

 Packaging cost.

 Advertising cost.

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22
 Use diagrams to explain your ideas

LOREM 3 LOREM 1
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tempus lorem ipsum lorem ipsum

Vestibulum nec
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LOREM 2
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 And tables to compare data

A B C

Yellow 10 20 7

Blue 30 15 10

Orange 5 24 16

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 Let’s review some concepts
Yellow Blue Red
Is the color of gold, butter and ripe Is the colour of the clear sky and the Is the color of blood, and because of
lemons. In the spectrum of visible deep sea. It is located between violet this it has historically been associated
light, yellow is found between green and green on the optical spectrum. with sacrifice, danger and courage.
and orange.

Yellow Blue Red

Is the color of gold, butter and ripe Is the colour of the clear sky and the Is the color of blood, and because of
lemons. In the spectrum of visible deep sea. It is located between violet this it has historically been associated
light, yellow is found between green and green on the optical spectrum. with sacrifice, danger and courage.
and orange.

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5000

4000

3000

2000

1000

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 2.
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For Business Plans, Marketing Plans, Project
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 Timeline
Yellow is the color of
Blue is the colour of the Red is the colour of danger Black is the color of ebony gold, butter and ripe White is the color of milk Blue is the colour of the
clear sky and the deep sea and courage and of outer space lemons and fresh snow clear sky and the deep sea

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Yellow is the color of White is the color of milk Blue is the colour of the Red is the colour of danger Black is the color of ebony Yellow is the color of
gold, butter and ripe and fresh snow clear sky and the deep sea and courage and of outer space gold, butter and ripe
lemons lemons

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Blue is the colour of the Red is the colour of danger Black is the color of ebony
clear sky and the deep sea and courage and of outer space

1 3 5

2 4 6

Yellow is the color of gold, White is the color of milk Blue is the colour of the
butter and ripe lemons and fresh snow clear sky and the deep sea

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 Gantt chart
Week 1 Week 2

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Task 1

Task 2 ◆

Task 3

Task 4 ◆

Task 5 ◆

Task 6

Task 7

Task 8

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 SWOT Analysis
STRENGTHS WEAKNESSES
Blue is the colour of the clear Yellow is the color of gold,
sky and the deep sea butter and ripe lemons

Black is the color of ebony White is the color of milk and

and of outer space fresh snow
OPPORTUNITIES THREATS

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 Business Model Canvas

Key Partners Key Activities Value Propositions Customer Relationships Customer Segments
Insert your content Insert your content Insert your content Insert your content Insert your content

Key Resources Channels

Insert your content Insert your content

Cost Structure Revenue Streams

Insert your content Insert your content

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 Funnel

AWARENESS Insert your content

DISCOVERY Insert your content

EVALUATION Insert your content

INTENT Insert your content

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 Team Presentation

Imani Jackson Marcos Galán Ixchel Valdía Nils Årud

JOB TITLE JOB TITLE JOB TITLE JOB TITLE
Blue is the colour of the clear Blue is the colour of the clear Blue is the colour of the clear Blue is the colour of the clear
sky and the deep sea sky and the deep sea sky and the deep sea sky and the deep sea

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 Competitor Matrix
HIGH VALUE 2

Competitor
Compet
itor
Our company

Competitor

HIGH VALUE 1
LOW VALUE 1

Competitor

Competitor Competitor

LOW VALUE 2
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 Weekly Planner
SUNDAY MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY SATURDAY

09:00 - 09:45 Task Task Task Task Task Task Task

10:00 - 10:45 Task Task Task Task Task Task Task

11:00 - 11:45 Task Task Task Task Task Task Task

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13:30 - 14:15 Task Task Task Task Task Task Task

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