This document discusses various cost concepts that are relevant for business operations and decision making. It groups the cost concepts into two categories: 1) accounting cost concepts used for accounting purposes and 2) analytical cost concepts used for economic analysis of business activities. Some key concepts discussed include opportunity cost vs actual cost, fixed vs variable cost, total/average/marginal cost, short-run vs long-run cost, historical vs replacement cost, and private vs social cost.

2. The cost concepts that are relevant to
business operation and decisions can be
grouped on the basis of their nature and
propose under to overlapping
categories:-
1. Cost concept used for accounting
propose
2. Analytical cost concepts and used in
economic analysis of business activities
COST CONCEPTS

3. ACCOUNTING COST CONCEPTS
• Opportunity Cost And Actual Cost
• Business Cost And Full Costs
• Actual Or Explicit Cost And Implicit Or
Imputed Cost
• Out- Of- Pocket And Book Cost

4. ACCOUNTING COST CONCEPTS
1. Opportunity cost and actual cost actual cost is all paid out costs of the business
firms to take the advantages of the best opportunity available to them. The
opportunity cost is the opportunity lost for lack of resources.
2. Business costs and full cost business costs include all the expenses that are
incurred to carry out a business. The concept of business costs is similar to the actual
or real costs.

5. Contd…
1. Explicit and implicit cost: The actual or explicit costs are those
which are actually incurred by the firm in payment for labour ,
material, plant, building, machinery, equipment, travelling and
transport, advertisement, etc. the total money expenses, recorded
in the book of account are, for all practical purposes, the actual
costs.
2. Out-of-pocket and book costs: the item of expenditure that
involve cash payments or cash transfers, both recurring and non-
recurring , are known as out-of-pocket costs. On the contrary, there
are certain actual business cost that do no involve cash payments,
but a provision therefore made in the book of account and they are
taken into account while finalizing the profit and loss account such
expanses are known as book cost

6. ANALYTICAL COST CONCEPTS
The analytical cost concepts
refers to the different concepts
that are used in analyzing the
cost- output relationship with
increase in inputs and outputs
and also the cost concepts that
figure in analyzing the effect of
expansions of production on
the society as a whole.

7. ANALYTICAL COST CONCEPTS(Con.)
Fixed And Variable Cost
Total, Average And Marginal Costs
Sort-run And Long-run Cost
Incremental Costs And Sunk Costs
Historical And Replacement Cost
Private And Social Costs

8. FIXED AND VARIABLE COST
Fixed Cost:- FC are that remain fixed an amount
for a certain quantity of output. Fixed cost those
not vary with variation in the output between zero
and a certain of output. In other words, cost that
do not vary or remain constant for a certain level of
output are treated as fixed cost.
Variable Cost:- VC are those which vary with the
variation in the total output. Variables cost include
cost of raw material, running cost of fixed capital,
such as fuel, repairs routine maintenance
expenditure, direct labour charge associated with
the labour of the output and the costs of all other
inputs that vary with outputs.

9. TOTAL, AVERAGE AND MARGINAL
COSTS
Total Cost:- TC refers to the total outlays of
money expenditure, both explicit and implicit, on
the resources used to produce a given level of
output. It includes both fixed and variable cost.
Average Cost:- AC is of statistical nature-it is not
actual cost. It is obtained dividing the total cost
(TC) by the output.
Marginal Cost:- MC is defined as the addition to
the total cost on account of producing one
additional unit of the product. Or, marginal cost is
the cost of the marginal unit produced.

10. SORT-RUN AND LONG-RUN COST
Sort-Run:- Sort-run refers to the time period
during which scale of production remain
unchanged. The cost incurred in the sort-run are
called sort-run costs. It includes both the variable
and the fixed costs.
Long-Run:- Long-run costs, on the other
hand, are those that are incurred to increase the
scale of production in the long-run. The costs that
incurred on the fixed factors like plant, building,
machinery, etc. are known as long-run cost.

11. INCREMENTAL COSTS AND SUNK
COSTS
 Incremental Cost: IC are closely related to
the concept of marginal cost but with a relatively
wider connotation. While marginal cost refers to
the cost of the marginal unit (generally 1 unit) of
output, incremental cost refers to the total
additional cost associated with the decisions to
expand the output or to add a new variety of
product, etc.
 Sunk Costs: SC are those which are made
once and for all and cannot we altered, increased
or decreased, by varying the rate of output, nor
can they be recorded.

12. HISTORICAL AND REPLACEMENT
COST
Historical Cost: HC refers to the cost incurred in
past on the acquisition of productive assets, e.g.
land, building, machinery, etc.
Replacement Cost: RC refers to the
expenditure made for replacing an old asset. These
concepts owe their significance to the unstable
nature of input prices. Stable prices over time, other
given, keep historical and replacement costs on par
with each other. Instability in asset prices makes the
two costs differ from each other.

13. PRIVATE AND SOCIAL COSTS
Private Cost: PC are those which are actually
incurred or for provided for by an individual or a firm
on the purchase of goods and services from the market.
For a firm, all the actual costs, both explicit and implicit,
are private costs. Private costs are internalized costs
that are incorporated in the firm’s total cost of
production.
Social Cost: SC on the other hand, refers to the
total cost born by the society due to production of
commodity. Social costs include both private cost and
the external cost.