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CONCEPTS OF

COST
& Various Types of
Cost

UNIT-4
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Definition of cost and price

• Cost: It is the true value of any commodity. The value of the


commodity or service in the best alternative use.
− Price that should be paid for the use of factors of
production to produce any good or services.
− Value of inputs needed to Produce any goods or
services.
− Generally refers to the price that must be paid for
an item or sacrifice necessary in order to obtain a
good or a service.

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Price
• It is not the true value of the commodity. It may or
may not indicate the cost.
• Result of interaction between consumer s’ demand for a
good and supply of that good by producer.

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VARIOUS
TYPES OF
COST
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While considering health problems,
costs may be differentiated as
follows:

• Direct costs

• Indirect
costs
Direct costs
• Costs borne by the healthcare system, community and
patients' families in addressing the illness.

• For example, we want to estimate the costs of


hospitalization for surgery. The direct cost of
hospitalization consists of a money equivalent of all the
resources that go into treating the patient.
Indirect costs
• Mainly productivity losses to society caused by the health
problem or disease.

• The patient has been in bed for some length of time, and
unable to go for work.
 If the patient is a person earning daily wages, this entails a
lost of earnings. This lost represents the indirect cost of
hospitalization.
 Even if the patient were a salaried employee who is
eligible for sick leave thus would not have incurred any
financial loss. But unable to work represents a lost
opportunity to society, and has to be valued at the rate of
the patient’s earnings for that period.
In considering the production process,
costs may be differentiated as follows:
• Fixed costs

• Variable costs

• Total costs

• Average costs

• Marginal cost
Variable cost (VC)
• Costs which vary with the level of production.

• Expenses that change in direct proportion to the activity


of a business.

• For example, labour, fuel, cost of raw materials etc.


Fixed cost (FC)
• Expenses whose total does not change in proportion to the activity
of a business.

• Costs which, within a short time span, do not vary with the quantity
of production.

• For example, rental expenses, salaries of employees etc.


Total cost (TC)

• All costs incurred in the production of a set quantity of


service.

• In economics, the total cost describes the total economic


cost of production and is made up of variable and fixed
costs.

• An example would be the cost of providing an


immunization service .
Average cost (AC)

• Average cost (AC) is a measure of the total costs of


production associated with each unit of output.

• Average costs indicate the resource requirements for each


unit of output.

An example would be the cost per immunization


provided.
Marginal cost (MC)

Marginal cost is the change in total cost that


arises when the quantity produced (or
purchased) changes by one unit.
Some other costs concept
Sunk cost
• Sunk costs are sums that have already
been spent and can not be recovered.

• For example, when a car is purchased,


it can subsequently be resold; however,
it will probably not be resold for the
original purchase price.
Explicit and Implicit costs

• If factor of production is hired, it is a explicit (out-of-pocket)


cost.
 The immediate cash payment to outsider
 Wages paid, rent on building, expenses made for water,
electricity, raw materials etc are the examples.
 It may take various forms like: wages paid to labor, interest
paid to bank, amount paid for raw materials.
 Recorded

• If a factor of production is owned it is a implicit (book-cost)


cost.
 Do not involve cash expenditure.
 Rent, salary etc he could receive by someone else are the
examples.
 Not Recorded but can be calculated. (Imputed Cost) 16
Historical and Replacement cost

• Historical cost describes the original cost of an


asset at the time of purchase or payment as
opposed to its market value.

• Replacement cost is the cost of capital goods at


current market price.

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Transaction cost

• Cost incurred in making an economic


exchange. For example, most people, when
buying or selling a stock, must pay a
commission to their broker; that
commission is a transaction cost of doing
the stock deal.

• To purchase the banana, our costs will be


not only the price of the banana itself, but
also
Transaction cost

 the energy and effort it requires to find out which of the


various banana products we prefer,
 where to get them and at what price,
 the cost of traveling from our house to the store and back,
 the time waiting in line,
 and the effort of the paying itself;
 the costs above and beyond the cost of the banana are the
transaction costs.
Accounting cost :
An accountant will take account
the payments and charges made
by the entrepreneur to the supplies
of various productive services.
Opportunity cost

•  The concept of opportunity cost is ‘a core principle in


economics. It is also called alternative cost. As we
know that resources at the disposal of man are limited
and they• can be put to more than one uses at any point
of time.

• For example, a farmer wants to get maximum return


from the resources available to him. He with the given
value of resources can produce sugarcane or cotton. He
prefers to invest money for the production of sugarcane
and sacrifices the production of cotton which was the
next best alternative use available to him.

• In other words when the farmer opts for the best use of
resources and produces sugarcane, he foregoes the
return expected from the production of cotton. The
value of the best alternative forgone when an
alternative is chosen is called opportunity cost.