Goseeko blog

What is Cost Analysis?

by Puja

Cost analysis is concerned with determining the money value of input used for production which is called as overall cost of production.


In economics, the Cost Analysis refers to the measure of the cost – output relationship, i.e. the economists are concerned with determining the cost incurred in hiring the inputs and how well these can be re-arranged to increase the productivity (output) of the firm.

Concepts of cost

Types of cost are as follows

1. Nominal and real cost –

Nominal cost is the money value of cost of production. It refers to expenses of production. The expenses paid to the factors he employs in the process of production.

The real cost are the pain and sacrifices of labour involved in the process of production.

2. Explicit and implicit cost –

Explicit cost is the cost made to other owner for the purchase or hiring of various other factors in the course of running a business. It refers to accounting cost. Examples of explicit costs include wages, lease payments, utilities, raw materials, and other direct costs.

An implicit cost has already occurred but not necessarily shown as separate expense.

3. Accounting cost and Economic cost –

Accounting cost are those where the entrepreneur pay direct cash for procuring the factors of production. For instance- wages paid to workers, electricity charges, etc

Economic cost are implicit cost where the factors or resources of production are used by the entrepreneur in his own business. For instance – a business man has a land. He uses the land for his business purpose instead of giving it for rent

4. Opportunity cost –

Opportunity costs are incomes from the next best alternative that is foregone when the entrepreneur makes certain choices.

For instance – a manufacturing company has a factory. He uses the factory for his business purpose instead of giving it for rent. These costs calculate the missed opportunity and calculate income that we can earn.

5. Business cost and full cost –

Business costs include all the expenses which incurs in carrying out a business. The concept of business cost is similar to the accounting or actual cost.

Full cost includes the opportunity cost and normal profit. Normal profit is minimum earning which a firm earns to remain in its present occupation.

6. Total, Average and Marginal cost –

Total cost refers to the total expenditure, both explicit and implicit on the resources used to produce a given output.

Similarly average cost is the cost per unit of output which is obtained by dividing the total cost (TC) by the total output (Q), i.e., Average cost = TC/Q

Marginal cost is the addition made to the total cost as a result of producing one additional unit of the product.

7. Fixed cost and variable cost –

Fixed cost are the expenditure incurred on the factors such as capital, equipment, plant, factory building which remain fixed in the short run and cannot be changed.

Variable costs incurs by the firms on the employment of variable factors such as labour, raw materials, etc., whose amount can be easily increased or decreased in the short run.

8. Direct and indirect cost –

Direct costs are those cost which id directly used in a particular product and process. For instance– manufacturing cost relating to production.

On the other hand indirect cost – indirect cost are not directly related to production. For instance office expense, salary

9. Incremental and sunk cost

These costs incurs when the business makes a policy decision. For instance, change of product line, acquisition of new customers, upgrade of machinery to increase output are incremental costs.

Suck costs are costs which the entrepreneur has already incurred and he cannot recover them again now. These include money spent on advertising, conducting research, and acquiring machinery.

Interested in learning about similar topics?

You may also like