What are different types of cost ? How would you calculate the cost of a finished product?

What are different types of cost ? How would you calculate the cost of a finished product?

Ans. Fixed or constant costs are the part of the total cost of the firm which does not vary with output, for example, rent of land and buildings, expenditures or depreciation, property taxes etc. When the period under consideration is sufficiently long to permit the essential adjustments in the capacity of the firm, the fixed costs no longer remain fixed. Then, these can be varied. The fixed costs are overhead costs for an economist and these are indirect costs for an accountant. When the output goes up, the fixed cost per unit of output comes down as the total fixed cost is then divided between larger number of units of output.

(i) Economic Cost – Economic cost of production includes the explicit costs and implicit costs, both. Implicit costs arise when certain inputs (including factors) are owned by the employer himself and employed in the production process. Such a cost is taken into consideration for decision making

purposes because if the money capital contributed by the entrepreneur in his own firm had been invested elsewhere (say a bank), it would have earned a certain amount of interest. In the same way, wages or salary of the entrepreneur will be an implicit cost. They are also termed a~ non-expenditure costs as they

are not recorded in the books of accounts of a firm.

Economic cost = Accounting or explicit costs + Implicit costs

(ii) Direct Costs – Direct costs. are those costs which have direct

relationship with a unit of operation such as a product, a process or a department

of the firm. This can be said in another way that the costs which are directly and

definitely recognizable are the direct costs .. For example, in operating railway

services, the cost of wagons, coaches or engines are direct costs.

(iii) Indirect Costs- The indirect or non-traceable or common or no assignable

costs are those whose course cannot be easily and definitely traced in

a plant, a product, a process or a department. As an example, in operating railway

services the cost of station, track, equipment, staff, etc, cannot be allocated to

either passenger or goods transportation; these are common costs.

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