Cost and its Main Concept Given in Micro Economics

>> Wednesday, May 27, 2009

Definition of Cost

Cost means all expenses which incurred for production and operation of business. Cost is importance because without calculating of cost, price of any product can not be calculated. Cost provides the information what price will be fixed after adding some margin. But in Cost accounting and economics, this concept is so important and a student of commerce should now every terms used in cost. After this he will able to calculate the price and making other cost policies to reduce cost and increase revenues.
Main Concepts of Cost

1. Money Cost

All expenses of operation of business paid in cash are called money cost. Its other name is real cost because these types of expenses are for getting facilities and services from others or getting raw material from suppliers. In company level business all cost is money cost because company is done business after charging every expenses in account. Some expenses, if company could not pay in previous years, then next year company will pay, after paying these expenses also become money cost.

2. Opportunity cost

Opportunity cost is the cost of producing any product when we produce any other product. Suppose, in a land we can produce X or Y products, but we produce X so Y’s production value is the opportunity cost because X can produce by sacrificing of Y product in same land. There is no any accounting treatment but from economic point of view, it is most important to know which products cost have also opportunity cost for making effective cost planning. With this we can decide, which product is profitable and why we are producing that product.

3. Social Cost

Social cost is the money burden of society. In society both public and company is responsible to sustain these cost because both are taking benefit from natural environment. Suppose, if a new factory established in any colony and then it is producing pollution. People will pay social cost in the form of treatment of different diseases and Company can pay social cost for making plant garden or free health services to the public living near colony where is the factory of company established. In Social accounting, calculation of social cost of company is very important for analysis cost and benefits relating to society and social responsibility.

4. Implicit Cost

Implicit cost is that cost which is not paid or payable to others. We does also not show debit side of profit and loss account because this cost of own resources of businessman. Suppose, if a businessman uses his building for production, businessman can save the amount of rent. This amount of rent is the implicit cost of his business. But, it is not recordable item because, there is not flow of cash from business and there is no increase the liability for not paying that type of expenses but in the partnership case, the situation of accounting treatment of implicit cost may different because, if a partner gives loan to partnership, he has power to get 6% interest on loan given by him.

5. Explicit Cost

Explicit Cost is that cost which is paid or payable to others. It is also shown debit side of trading in case of direct expenses or profit and loss account in case of indirect expenses.

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