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    Analysis of Costs-12

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    Abhijit1781989
    1) Better cost management leads to maximized profits as firms can minimize costs. Maruti Udyog posted a profit after focusing on cost reduction. 2) There are different types of costs including opportunity costs, implicit and explicit costs, economic costs, marginal costs, sunk costs, direct and indirect costs, and fixed and variable costs. 3) Cost functions determine how costs change with output levels in the short run. Short run average total costs and average variable costs are U-shaped, while marginal costs intersect them from below at the lowest point.

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    Analysis of Costs-12

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    Abhijit1781989
    36 views15 pages
    1) Better cost management leads to maximized profits as firms can minimize costs. Maruti Udyog posted a profit after focusing on cost reduction. 2) There are different types of costs including opportunity costs, implicit and explicit costs, economic costs, marginal costs, sunk costs, direct and indirect costs, and fixed and variable costs. 3) Cost functions determine how costs change with output levels in the short run. Short run average total costs and average variable costs are U-shaped, while marginal costs intersect them from below at the lowest point.

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    1) Better cost management leads to maximized profits as firms can minimize costs. Maruti Udyog posted a profit after focusing on cost reduction. 2) There are different types of costs including opportunity costs, implicit and explicit costs, economic costs, marginal costs, sunk costs, direct and indirect costs, and fixed and variable costs. 3) Cost functions determine how costs change with output levels in the short run. Short run average total costs and average variable costs are U-shaped, while marginal costs intersect them from below at the lowest point.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    36 views15 pages

    Analysis of Costs-12

    Uploaded by

    Abhijit1781989
    1) Better cost management leads to maximized profits as firms can minimize costs. Maruti Udyog posted a profit after focusing on cost reduction. 2) There are different types of costs including opportunity costs, implicit and explicit costs, economic costs, marginal costs, sunk costs, direct and indirect costs, and fixed and variable costs. 3) Cost functions determine how costs change with output levels in the short run. Short run average total costs and average variable costs are U-shaped, while marginal costs intersect them from below at the lowest point.

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    © All Rights Reserved
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    of 15

    Analysis of Costs

    Importance
    Better cost management leads to
    maximization of profits. A firm that wants to
    maximize its profits should also focus on
    minimizing costs. Avery good example is
    how Maruti Udyog Limited has posted a
    net profit of Rs 55 crore in the financial
    year2001-02 compared to a loss of Rs147
    crore in the previous financial year.

    Types of costs
    Opportunity Costs
    Implicit and explicit costs
    Economic costs
    Marginal incremental and sunk costs
    Direct and indirect costs
    Fixed and variable costs

    Opportunity costs
    It can be defined as the cost of any
    decision measured in terms of the best
    alternative which has been sacrificed. Ex a
    person who has Rs 100 as his disposal can
    spend it on either of three options having
    a dinner, going for a music concert, or for a
    movie. The person prefers going for a
    dinner rather than to movie and the movie
    over the music concert. Hence his
    opportunity cost is sacrificing the movie ,
    the next best alternative once he goes for a
    dinner.

    Implicit and explicit costs


    Implicit costs are the value of foregone
    opportunities that does not involve a
    physical cash payment.
    Though implicit costs are not included in
    books of accounts , they do play an
    important role in a decision making
    process.
    Explicit costs can be defined as the costs
    which involves actual payment to other
    parties.

    Economic costs
    Economic cost refers to the costs
    involved for all factors of production
    including those purchased from
    outside as well as those owned by the
    firm.
    Its basically a normal payment for all
    the factors of production , including
    managerial and entrepreneurial skills
    and capital provided by the owners of
    the firm.

    Marginal, incremental, sunk costs


    Marginal costs can be defined as the change in
    the total cost of a firm as a result of change in one
    unit of input.
    Incremental cost is addition of a new product line ,
    acquiring a company or hiring an in house legal
    staff. Thus, it can be said that marginal cost is
    subset of incremental cost.
    Sunk costs are those which incurred in the past or
    that have to be incurred in the future as a result of
    contractual agreement- ex the cost of inventory
    and future rent charges for a warehouse

    Direct and Indirect Costs


    Direct costs are the costs that can be
    directly associated to the production
    of a given product-ex use of raw
    materials, labour input etc
    Indirect costs are such expenses that
    can not be separated and directly
    attributed to individual units of
    production ex electricity charges,
    depreciation of plants and building

    Fixed and variable costs


    Fixed costs are those costs which do not
    vary with the changes in the output of a
    product, and has to be paid even if the
    firms level of output is zero.ex interest on
    borrowed capital, contractual
    rent,depreciation charges, salaries of top
    level management and others.
    Variable costs are those costs that vary
    with the level of output.ex-payment of raw
    materials, wages and salaries

    Cost and production functions


    A cost function determines the
    behavior of costs with the change in
    output. It can be a schedule, graph, or
    a mathematical relationship showing
    the minimum achievable cost for
    producing various quantities of output.
    If C represents total cost and Q
    represents the level of output, then
    the cost function is represented as
    C=C(Q)

    COST AND PRODUCTION


    FUNCTIONS
    Cost functions are derived functions
    from production functions. Within the
    non-inferior zone of the factors of
    production, their total employment will
    also increase as we move along the
    expansion path.

    Equations
    L= amount of labour
    K= amount of capital
    r= rate of interest
    w= wages
    C=Lw+Kr where C= total cost

    Short run cost functions


    Short run cost functions help in determining the
    relationship between output and costs in the
    short run .
    The short run average total costs(SRATC) and
    average variable costs are slightly U shaped.
    The marginal cost(MC) curve intersects both
    the average variable cost curve and short run
    average total cost curve at their lowest point and
    from below.

    Short run cost functions


    Short run cost functions help in determining the
    relationship between output and costs in the
    short run .
    The short run average total costs(SRATC) and
    average variable costs are slightly U shaped.
    The marginal cost(MC) curve intersects both
    the average variable cost curve and short run
    average total cost curve at their lowest point and
    from below.

    The short run cost curve

    MC

    SRATC

    O
    S

    AVC

    T
    S
    MINIMU
    M atc

    QUANTITY

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