Concept of Cost

Production is the result of an effective combination of a factor of production. The firm for the contribution of their services remunerate, this factor’s rent is paid for land wages paid for labour, interest is paid for capital and profit organization. Production of this factor production in the form of rent, wages, interest, and profit generate the cost of goods. In other words, the concept of cost refers to all expenses calculated by the firm on the production of a commodity loss includes explicit and implicit expenses.

There are various types of costs. They are as follows.

• Total cost.
• Average cost.
• Marginal cost.
• Fixed and variable cost.

Total cost

The sum of fixed cost and variable cost at varying levels of output is called total cost. It is expressed as,

TC=TFC+TVC
When,
TC= Total cost
TFC= Total foxed cost
TVC= Total variable cost

Average cost

The average cost can be attended by dividing total cost by the quantity of output. It is also called the average cost of production. It is expressed as,

AC= TC/Q
When,
AC= Average cost
TC= Total cost
Q= quantity of output

Marginal cost

Marginal cost is the addition to total cost by the production of an additional unit of the commodity. It is also known as the marginal cost of production. Marginal cost is important for deciding whether any additional output can be productive or not. It is expressed as,

MC= TCn+1– TCn
Where,
MC= Marginal cost
TCn+1= Total cost of n+1 units
TCn= Total cost of n units

Fixed cost and variable cost

Fixed cost does not change with the change in the quantity of production, it remains fixed whether the output is increased or decrease or even becomes zero. In other words, expenses on fixed factors remain on change irrespective of the level output. Fixed costs are also known as supplementary costs and overhead costs. Example of fixed cost is the rent of the factory, insurance premium, the salary of the Permanente employees, maintenance of the building, licenses fee, etc.

The payment to the variable factors of production is called variables cost. Variables cost vary with the quantity of output. They are also called as prime cost or special cost or direct cost. For an example of variable cost is wages of temporary labour, cost of raw materials, electricity transport advertisement.