Theory Of Cost And Revenue Flashcards
What is cost ?
Cost can be defined in various ways depending on one situation or the other depending on the cost figure to be used.
Cost generally refers to the price that must be paid for an item and is summed up in the word sacrifice.
Firms cost determines its supply while supply and demand determine price
Cost refers to money cost, real cost and opportunity cost.
Concepts of cost
Money and real cost
Explicit and implicit cost
Historical or replacement cost
Money and real cost:these are the total expenses by a firm in producing a commodity.
Explicit and implicit costs: explicit costs are those expenses which are incurred in buying goods and services directly. The implicit costs are the inputted values of the owners resources and services put into production.
Historical and replacement costs: historical cost of an asset incurred at the time that asset was originally acquired. Replacement cost is the cost which will have to be incurred if the asset is purchased now.
Concepts of cost continued…
Out of pocket and book costs
Private and social cost
Out of pocket and book costs: this are costs that involve immediate payments to outsiders as opposed to book costs that do not require cash expenditure.
Private cost and social cost:while private cost refers to the cost of production to an individual producer,social cost refers to the cost of producing a commodity to society in the form of resources that are used to produce it.
Types of cost
Direct or indirect
Direct or indirect cost: direct costs are those that are readily identified and visibly traceable to a particular product,class of products,operation process or plants while indirect costs are those that are neither readily identified nor visibly traceable to specific goods,services or operations but are nevertheless charged to the product in standard accounting practice
Types of cost
Fixed and variable cost
Fixed or constant cost as they are sometimes called are costs that do not vary with output. They are costs that require a fixed outlay of funds such as rent while variable cost on the other hand are costs that are functions of output in the production period. Example is cost of raw materials , wages and salaries.they vary with the level of output
Types of cost
Short run and long run costs
Short run costs are costs that can vary with output but not with plant capacity. This is a period in which fixed cost remain unchanged
Long run costs are cost that vary with the size of the plant and with other facilities normally regarded as fixed in the short run. It is a period of time in which the firms output emanates from a variable stock of resources and therefore a period in which there are no fixed costs
Short run costs
Total fixed and variable costs
Total cost is the sum of its total variable costs and fixed cost
Thus TC=TFC+TVC
Relationship between AVC and AVERAGE PRODUCT
AVC and average product vary inversely with one another. Therefore when average product of the variable factor rises in the beginning as more units of the variable factor are employed, the average variable cost must be falling
Relationship between ATC AVC AND MC curves
The curves shows that the region where ATC and AVC are falling the MC is falling faster than both of them and when ARC and AVC curves are rising the MC curve is rising faster than both of them this implies that the MC curve must intersect the ATC and AVC from below at their minimum points.
