THEORY OF

COST & PROFIT

GROUP 4 BS ENTREP 2-1
 OBJECTIVES
1. Describe the concept of the theory of cost and profit in
economics.
2. Distinguished fixed and variable cost.
3. Compute total cost based on total fixed cost and total
variable cost.
4. Differentiate opportunity and imputed cost; and
5. Discuss how to compute profit.
 TERMS TO REMEMBER

ASSETS a resource that has economic value owned by individual or a company.

COST value of money that has been used up to produce something.

one who introduces new things and uses this innovations for the betterment of the economy.
ENTREPRENEUR

IMPUTED COST cost that is implied but not included in financial report or accounting record.

INVENTORIESa detailed list or report in one's possession.

OPPORTUNITY COSTdeals on how much more (less) one gains in giving up alternatives to benefit from a choice.

REVENUES also known as income: total amount received by the company for the goods or services sold.
 GENERAL
CONCEPT
The most general concept of business is to reward
entrepreneurial efforts. Businesses are made to sell
products to consumers
 COST
A firm maintains a stock of assets that it can

CONCEPT
use for production

TWO CLASSIFICATION OF ASSETS

1. Real Assets - machineries, buildings, materials, and supplies.

2. Monetary Assets - forms of money and near money, part of

which the firm transforms intro real assets through purchasesbor
acquisition.
 IMPUTED AND OPPORTUNITY
COSTS
IMPUTED COST
Imputed Costs are also called hidden costs or implicit costs of the
business/firm. Imputed costs are not expenditures, but it is a cost of
production. Put simply, these are circumnstances where the company uses its
own assets to gain some benefits but therefore gives up all other possible
alternatives of income.
OPPORTUNITY COST
An opportunity cost is the economic concept of potential benefits that a
company gives up by taking an alternative action. In other words, this is the
potential benefit you could have received if you had taken action A instead of
action B.
 2 TYPES OF COST-OUTPUT
RELATIONSHIP
Cost-Output Relationship Cost-Output Relationship
in the Short Run in the Long Run

The cost-output relationship in the short

The cost-output relationship in the long run
run refers to how a company's production
pertains to how a company's production costs
costs change as it adjusts its level of
change as it adjusts its level of output while
output while keeping some factors of
allowing all factors of production to vary.
production fixed
FIXED AND VARIABLE COSTS
Total Cost (TC) has two basic components, namely : Fixed and
Variable Costs.
Fixed Cost (TFC) does not vary with output
Variable Cost (TVC) does direct proportion
The following equation illustrates;
TC = TFC + TVC

Where:
TC = Total Cost
TFC = Total Fixed Cost
TVC = Total Variable Cost
 MARGINAL COST
The following are the marginal cost concepts with the equations that
define them:
∆TC ____
____ ∆TC
MC= =
∆Q
_ ∆Q
_
∆TVC
______
MVC
∆Q
_
=
Therefore: MC = MVC since TFC is constant and TVC is the only component that
causes TC to change where:

MC = Marginal Cost or change in Total Cost

VC = Marginal Variable Cost or change in Total Variable Cost
Q = Quantity of output
∆C = Infinitesimal change or a unit change that is infinitely small
 AVERAGE COST
Average cost is cost per unit of output which assumes the following
terms:
TC TFC T
___
ATC= ___ AFC ___ AVC=
Q
_ Q
_ Q
V
_
=
where:
ATC = Average Total Cost or Cost per Unit of Output
TC Total Cost Q = Quantity of Output
AFC = Average Fixed Cost or Fixed Cost per Unit of Output
TFC = Total Fixed Cost
AVC = Average Variable Cost or Varia- ble Cost per Unit of Output
TVC = Total Variable Cost

TFC TV
ATC= ___ + ___
ATC= AFC + AVC
Q Q
C
Thank You
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