Management

CONCEPTS OF COST

When commodities and services are produced, various expenses have to be incurred, e.g., purchase of raw materials, payment to labour, landlord, capitalist, etc. The sum total of the expenses incurred plus the normal profit expected by the producer is called the cost of production. The various concepts of cost are discussed below:

1. Nominal Cost and Real Cost: Nominal cost is the money cost of production. The real costs of production are the pain and sacrifices of labour involved in the process of production.

2. Explicit and Implicit costs: Explicit costs are the accounting costs or contractual cash payments which the firm makes to other factor owners for purchasing or hiring the various factors. Implicit costs are the costs of self-owned factors which are employed by the entrepreneur in his own business. These implicit costs are the opportunity costs of the self-owned and self-employed factors of the entrepreneur, that is, the money incomes which these self-owned factors would have earned in their next best alternative uses.

3. Accounting Costs and Economic Cost: Accounting costs are the actual or explicit costs which are paid by the entrepreneurs to the owners of hired factors and services. On the other hand, economic costs not only include the explicit costs but also the implicit costs of the self-owned factors or resources which are used by the entrepreneur in his own business.

4. Opportunity Cost: The opportunity cost (or transfer earnings) of any good is the expected return from the next best alternative good that is forgone or sacrificed. For example, if a farmer who is producing wheat can also produce potatoes with the same factors. Then, the opportunity cost of a quintal of wheat is the amount of output of potatoes given up.

5. Business Cost and Full Cost: Business costs include all the expenses which are incurred in carrying out a business. The concept of  business cost is similar to the accounting or actual cost....