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Concept Of Cost

  Concept of Cost
  1. Opportunity Cost

    1. The concept of opportunity cost is a fundamental impression of cost in economics. As the resources of the society are in short supply, we cannot manufacture all commodities that the people may wish for.

    2. Therefore, when more resources are owed to one commodity some other product has to be foregone or forfeited.

    3. The opportunity cost of a commodity is therefore the value of the next most excellent substitute commodity that is forgone so as to release resources for greater manufacture of the former.

    4. It adopts the economic opportunity costs include both explicit and implicit costs and therefore both should be considered into record in rational decision making as the manager is also faced with the problem of restrained maximisation.

    5. He functions with a budget restraint. Whenever more resources are distributed by him to one division or department the firm, they have to be withdrawn from another and therefore the opportunity cost is integrated.

  2. Historical Cost as Sunk Costs

    1. There is a significant disparity among the approach of economists from accountants considering the treatment of fixed costs incurred on durable commodities such as machines, buildings.

    2. The accountants take historical costs of these capital commodities that is the price at which they were originally purchased and a provided and a given percentage of the original price are considered as depreciation which is charged to current costs of manufacturing per year.

    3. Nevertheless, economists regards the historical costs as sunk cost which is irrelevant to the current costs of production and therefore cannot be the fundamental of deciding upon regarding manufacture and pricing products.

    4. Sunk costs are those outlays that cannot be covered back. The economists follows the doctrine that departed and regards the recent opportunity costs of these capital goods after they have been procured that is relevant for deciding upon in the current period.

    5. If capital goods can be put to an alternative application or can be let out to others, the earnings in the next best substitute or the rental value of the machines if they are hired by others would incorporate the opportunity costs of these capital goods and could be counted up by the economists as part of the current cost of manufacture.

  3. Accounting Costs and Economic Costs

    1. The disparity among the accounting costs and economic costs needs additional consideration. This difference also makes unambiguous the meaning of economic profits.

    2. The accounting costs are called explicit costs which incorporate wages to hire labour, prices of inputs fuel and semi-finished commodities bought for application in manufacturing and rental price of capital equipment and buildings.

    3. When an entrepreneur undertakes as act of manufacturing, he has to pay prices for the factors which he applies for manufacturing. He therefore, pays remuneration to the labourers employed, prices for raw materials, fuel and power used, rent for the building he hires for the manufacturing work and the rate of interest on the money borrowed for doing business.

    4. All these are incorporated in his cost of manufacturing. An accountant will consider into account only the outlay incorporated on buying or hiring several inputs or factors for use in manufacturing.

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