 Fixed costs are the costs that are not affected by the
level of activity over a feasible range of operation.
 Examples for fixed costs are taxation, insurance and
interest
 Variable costs are the costs that vary with the
operation and level of activity.
 Examples for variable costs are; Labour, Energy, and
maintenance

 Incremental Cost is the additional cost that results
from increasing the output of the system..
 Reference is usually made to an increase of cost in relation to
some other factor, thus resulting in such expressions as
incremental cost pr ton, incremental cost per gallon, or
incremental cost pr unit of production

 Direct costs can be reasonably measured and
allocated to a specific output or work activity -- labor
and material costs directly allocated with a product,
service or construction activity.
 For example, the material needed to make a chair
would be a direct cost.

 Indirect costs are difficult to allocate to a specific
output or activity. i-e costs of common tools, general
supplies, and equipment maintenance
 Overhead cost consists of plant operating costs that
are not direct labor or material costs. Examples of
overhead include electricity, general repairs, property
taxes, and supervision.
 indirect costs, overhead and burden are usually used
interchangeably.

 Standard Costs are planned costs per unit of output
that are established in advance of actual production.
 Developed from??
 Labor hours, materials etc….

 Cash costs are costs that involve cash payments and
results in cash flow. They are the estimated costs and
future expenses for the alternatives being analyzed.
 Book costs are costs that do not involve cash payments
but it represent the recovery of past expenditures over a
fixed period of time.

 A sunk cost is one that has occurred in the past and has
no relevance to estimates of future costs and revenues
related to an alternative course of action.
 An opportunity cost is the cost of the best rejected
( i.e., foregone ) opportunity .forgone because of
limited resources;

 Life-cycle cost is the summation of all costs, both
recurring and nonrecurring, related to a product,
structure, system, or service during its life span.
 Life cycle begins with the identification of the
economic need or want ( the requirement ) and ends
with the retirement and disposal activities.
 LCC are a summation of all the costs (and some
revenues) over the entire life span of a structure, or
system.

 Recurring costs
 Recurring costs are costs that are repeated when an
organization produces similar goods or services on a
continuing basis.
 Examples of recurring costs are variable costs, because they
repeat with each unit of output
 Nonrecurring costs
 Nonrecurring costs are those costs which are not repetitive
with the production of a merchandise or service.

 Examples of recurring costs are purchase cost for real estate
upon which a plant will be built and construction costs.

 Consumer goods and services are those
products or services that are directly used by
people to satisfy their wants. Food, clothing,
homes, cars, television sets, haircuts, opera,
and medical services are examples.
 Producer goods and services are used to
produce consumer goods and services or
other producer goods. Machine tools, factory
buildings are examples.

 Goods and services are produced and desired
because they have utility—the power to
satisfy human wants and needs.
 Utility is most commonly measured in terms
of value(price that must be paid to obtain the
particular item)

 Goods and services may be divided into two
types:
1. necessities
2. luxuries
 These terms are relative, because, for most
goods and services, what one person
considers a necessity may be considered a
luxury by another.

 The relationship between price and demand
can be expressed as the linear function
 where a is the intercept on the price axis
and −b is the slope.

 Most general economic principles are stated
for situations in which perfect competition
exists.
 Perfect competition occurs in a situation in
which any given product is supplied by a
large number of vendors and there is no
restriction on additional suppliers entering
the market.

 Monopoly is at the opposite pole from perfect
competition.
 A Perfect monopoly exists when a unique
product or service is only available from a
single supplier and that vendor can prevent
the entry of all others into the market.

 Maximum total revenue can be obtained by,

 Fixed costs remain constant over a wide
range of activities, but variable costs vary in
total with the volume of output

 An economic breakeven point for an
operation occurs when total revenue equals
total cost.

 A company produces circuit boards used to
update outdated computer equipment. The fixed
costs $42,000 per month, and the variable cost is
$53 per circuit board. The selling price per unit is
p=$150−0.02D. Maximum output of the plant is
4,000 units per month.
 a. Determine optimum demand for this product.
 b. What is the maximum profit per month?
 c. At what volumes does breakeven occur?
 d. What is the company’s range of profitable
demand?

 An electric power plant uses solid
waste for fuel in the production of
electricity. The cost Y in dollars per
hour to produce electricity is
Y = 12 + 0.3 X +0.27X^2. Revenue
in dollars per hour from the sale of
electricity is15 X − 0.2X^2.Find the
value of X that gives maximum
profit.