COST CONCEPTS J P Bharathi B Com M
COST CONCEPTS J. P. Bharathi B. Com, M. Phil, PG Diploma in Psychotherapy & Counseling, MS (Psychology & Counseling), Certificate in Astrology, PS Univ. Lecturer, Dept. Of commerce St. Ann’s College for Women And also a Facilitator, Corporate Trainer, Writer and a Counselor
COST FUNCTION �COST FUNCTION IS THE RELATION BETWEEN COST AND OUTPUT �COST FUNCTION IS DERIVED FROM PRODUCTION FUNCTION �COST OF PRODUCTION IS DETERMINED BY THE PHYSICAL RELATION BETWEEN INPUT, OUTPUT AND PRICES.
COST OF PRODUCTION �IT IS THE AMOUNT OF MONEY SPENT OR THE PRICES PAID TO THE INPUTS USED FOR ITS PRODUCTION, It Includes, �Raw material cost �Rent of buildings �Wages and salaries �Interest on capital �Repair charges �Depreciation �Expenses like coal, oil, electricity, gas �Normal profits
What is money cost? All expenses, means �Examples. Therefore total cost includes all expenses which are both Explicit or Expressed costs and Implicit or Implied Costs.
Types of Costs 1. Accounting costs and Economic Costs. Accounting is an Historical Concept. It is Historical as it records past costs in the company. It is for the Legal, Financial and Tax purposes of the company. Accountants Ignore Implicit costs or Implied costs. ****** Economic costs helps in decision making, so it is also future costs, involves in Future revenues and planning. Therefore, Accountant tells what has happened, but the economists projects what will happen.
2. Explicit and Implied Costs Explicit costs are Cash payments, actual or business costs. Wages, salaries, Interest, Rent Implicit Costs are owned by owners by himself, does not involve cash payments so they are not recorded in the books of accounts, like own salary, opportunity costs, own rent, own car, Assets
3. Out of Pocket Costs and Book Costs Out of Pocket costs are current cash payments. also called Explicit costs, they are wages, salaries, Interest, Rent and the like. Book Costs- Unpaid Salary of the owner, manager, Depreciation, unpaid interest, cost of owners. They are the self owned factors of production. Book costs can be converted into out of pocket costs. Machinery sold out and hired for the purpose. This will help in taking liquidity decisions.
4. Historical and Replacement Costs We can value assets in two methods, Historical or replacement costs. Historical method- cost of past price, pessimistic, poor prediction for managerial decisions, and future cost will be wrong. Replacement Cost- Future price, takes care of inflation and makes correct adjustments.
5. Real Costs �Individual Producer considers Real Costs. �Society Considers Real costs- It is the Effort, Sacrifice, disutility, wastage. In all these we cannot come to a precise measurement.
6. Opportunity Costs Modern Economists call Opportunity costs as sacrifices. 1. Motivating 2. Incentive oriented 3. Social cost 4. Utility 5. Compensating It should take care of Transfer price, Opportunity price, supply price.
7. Business Costs and Full Costs Total money expenses. It includes opportunity costs and normal Profits.
8. Incremental Costs and Sunk Costs This cost is incurred when change is made in the company , it is also called New costs. Incremental Costs-New production, New machinery, new Advertisement, sales promotion will result in incremental costs. It cannot be retrieved. All this incurred for existing products and not for new products. • Sunk Costs- Sunk costs do not change the level of Business activity. Expenditure on buildings and machinery is sunk costs. Past expenses are sunk costs, ex. Out dated machinery.
9. Direct Costs and Indirect Costs Direct Costs- Traceable costs Relatable costs Seen costs Divisible costs Visible costs Recorded costs Indirect Costs-Untraceable costs Unreadable costs Unseen costs Indivisible costs Invisible costs Unrecorded costs
10. Fictitious Costs �CANNOT TOUCH, ONLY WE CAN FEEL THE COSTS. �THERE WILL BE LOSS OR PROFITS �CANNOT RELATE �CANNOT RELY �CANNOT COUNT ON THEM
11. Fixed and Variable costs �Fixed for a period or output or time. �Variable changes with the period and number of units or time.
12. Short Run and Long Run Costs �Depends On time, Production or period.
Cost Concepts Very important for the existence, continuity and survival of the �Business man �Production �Economic Activity �Progress �Growth �Development �Prosperity of the Economy
What did we learn in cost concepts? �Accounting and Economic costs �Explicit/expressed or Implicit/Implied costs �Out of pocket costs and Book costs �Historical costs and Replacement Costs �Real Costs and Fictitious Costs �Opportunity costs �Business Costs and full Costs �Incremental costs and Sunk costs �Direct costs and Indirect costs �Fixed and Variable Costs �Short run and Long run costs
What does Economics teach us? �There is Sufficiency for mans need but not for mans greed. �Economic Costs Concepts teach us how to increase production, with proper planning and reduce expenses. �How to Efficient.
WE, THE EMPOWERED ECONOMISTS ILL------ Ki. LL-----or Ski. LL, it’s our choice, Let us use our, “SKILL”, “Make the performer perform better”…. . THANK YOU
SUCCESSFUL ECONOMISTS � THANK YOU MY DEAR STUDENTS by, J. P. Bharathi
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