Meaning Of Cost Concept: Types And Basic Cost Concept


The cost concept before going on to discuss the basic concept. It is important to define the cost of production, the theory of cost.

What Is Cost Production?

This is what it takes in terms of human and material resources in producing a commodity. For goods and services to be produced, all the factors of production (Land, Labour, Capital And Entrepreneur) have to be combined.

Cost can also be seen in two different perspectives:

1. Cost of an opportunity cost (economic view).

2. Cost as in accountant view.

In terms of opportunity cost; Cost can be defined as the measure of something which has to be given up in order to get another thing. Economist view.

Accountant view of cost; we think in terms of money to be given up in order to achieve the desire goal. Based in these reasons we have different types of cost.

Basic Cost Concept

1. Total Cost

This consist of all the amount of quantities cost incurred in the production of a given output commodity. Total cost of a firm as arrived at by adding the fixed and variable cost.

2. Average Cost

It is the cost per unit of output. That is the cost of a commodity out of all the products produce by a firm. It is arrived at, by dividing the total cost by the total number of output.

3. Average Variable Cost

This refers to cost per unit of variable cost of output. This is arrived at, by dividing the total variable by the total number of output.

4. Average Fixed Cost (AFC)

It is the fixed cost of producing a unit of output. It is also cost dividing output. AFC = TFC = ATC.

These are costs that do not complete with output. They include cost of equipment building machine and land etc. They essential when there is profit is made or not, they are employed protect.

5. Variable Cost

These are cost of production that change with output increasing, they are bound to increase, they include cost of producing raw materials, labour e.t.c it is calculated as VC = TC = FC.

6. Marginal Cost

This is the change in total cost that change production about, by a unit change in the quantity of output that is the extra cost of increasing output by one more unit.