Cost Production and Types of Cost

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Generally, the term cost of production refers to the ‘money expenses’ incurred in the production of a commodity. But money expenses are not the only expenses incurred on the production of a commodity. There are number of services and inputs such as entrepreneurship, land, capital etc., which are offered by an entrepreneur without changing any price or receiving any payment for them. While computing the total cost of production, allowance should be made for such expenses. It is therefore essential to have clean understanding for the different types of cost:

Some example of the Types of Cost:

1. Actual (or, Acquisition or, Outlay) Costs: Actual costs are the costs which the firm incurs while producing or acquiring a good or a service e.g. the cost on raw material, labor, rent, interest, etc. The books of account generally record this information. The actual costs are also called the out la y costs or acquisition costs or absolute costs.

2. Opportunity (or, Alternative) cost: are the returns from the second-best use of the firms resources which the firm forgoes in order to avail of the return from the best use of the resources.

3. Outlay Costs: As discussed above, outlay costs mean the actual expenditure incurred for producing or acquiring a good or service. These actual expenditures are recorded in the books of account of the business unit, e.g., wage bill. These costs are also known as actual costs or absolute costs.

4. Sunk Costs : are the costs that are not altered by a change in quantity and cannot be recovered; e.g., depreciation. Sunk costs are a part of the outlay costs. However, most business decisions require cost estimates that are essentially incremental and not sunk in nature.

5. Explicit (or, Paid-out) Costs: Explicit costs are those expenses, which are actually paid by the firm (paid-out costs). These costs appear in the accounting records of the firm.

6. Implicit (or, Imputed) Costs : are theoretical costs in the sense that



References: Mehta, P.L.Managerial Economics,Analysis problems and cases. New Delhi: Sultanchand & Sons, 1999, Sixth Edition. Dhingra, I. C.; Garg, V. K. Micro economics & Indian Economics. New Delhi: Sultanchand & Sons

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