Fixed variable &incremental

cost.

• Abu Umeer

• 14ch42.

• Bilal

• 14ch111

PRESENTED BY……….

Cost?

It is used for analyzing the cost of a project in short and long run. • Expenditure incurred in producing a

product or in rendering a service• measurement, in monetary terms, of

the amount of resources used for the purpose of production of goods or rendering services.

IMPORTANCE OF COST

Regardless of industry in which a firm

operates costs, are relevant and of

major importance to efficient operation

of that firm

The concept of cost is central to

business decision making.

A firm which produces its goods and services at

comparatively lower cost with a qualitative edge over

its competitor will not only survive but also prosper.

Prices are determined by cost in all market structure

To make effective business decisions, the business

manager needs to be aware of a number of costs

concepts and their respective uses.

Types of Cost:

Actual costs and opportunity costs

Marginal, incremental, and sunk costs

Replacement costs and historical costsUrgent costs and postponable costs

Fixed and variable costsTotal ,average and marginal costShort-run costs and long-run costsPrivate costs and social costs

FIXED COST:

⌂ Fixed costs are those costs, which do not vary with the changes in the output of a product.

⌂ They are associated with the existence of a firm's plant and, therefore, must be paid even if the firm's level of output is zero.

⌂ . All costs that do not fluctuate directly with production volume are fixed costs.

⌂ . FC is independent of output.⌂ Eg: Depreciation, Interest Rate, Rent, Taxes

⌂ executives’ salaries,, and insurance expenses.

.

• Total fixed cost (TFC): All costs associated with the fixed input.

• Average fixed cost per unit of output: AFC = TFC /Output

VARIABLE COSTS

⌂ Variable costs are those costs that vary with the level of output.

⌂ Variable costs increase but not necessarily in the same proportion as the increase in output.

⌂ Variable Costs is the rest of total cost, the part that varies as you produce more or less. It depends on Output.

⌂ Variable cost equals total cost minus fixed cost.

Eg: Increase of output with labour. direct labor and direct materials costs.

• Total variable cost (TVC):

All costs associated with the variable input.• Average variable cost- cost per unit of output:

AVC = TVC/ Output

INCREMENTAL COST.

• Incremental cost is the cost associated with increasing production by one unit. Because some costs are fixed and other variable, the incremental cost will not be the same as the overall average cost per unit. The cost figure can be used for a variety of economic calculations, most notably the point at which increasing production ceases to be efficient.

• A very simple example would be a factory making widgets where it takes one employee an hour to make a widget. As a simple figure, the incremental cost of a widget would be the wages for the employee for an hour plus the cost of the materials needed to produce a widget.