Important and Various Concepts of Cost

The concept of cost is differently used by different people depending upon the purpose for which they are used. An accountant is always interested in recording the actual cost for determining the business result. An economist is interested in making the use of those cost concepts which help in decision making. Thus, the concepts of cost in each are different. This is briefly explained below.

  1. Fixed and variable cost

Fixed costs are those costs which remain fixed irrespective of the quantity of output produced by a business firm. Cost of machinery, equipment, land and buildings, salaries and wages to permanent staff etc. are examples of fixed costs. Variable costs are those costs which vary almost in direct proportion to volume of production. Cost of direct material, direct labor and direct expenses such as electric power, fuel etc. is examples of variable costs.

  1. Opportunity and outlay cost

Opportunity costs arise when there are alternatives. If a business man chooses a particular course of action, he has to forego another alternative course of action and the cost of opportunity foregone is called as opportunity cost. Outlay costs are those costs which are actually incurred by a business firm like salaries and wages, raw materials, plant, machinery etc. they are recorded in the accounts.

  1. Short and long term costs

It is distinguished on the basis of time. Short run costs are those costs which are incurred in the short run and vary with the quantity of output produced. All variable costs are treated as short term costs. On the other hand, long run costs are those costs which are incurred for increasing the level of production in the long run. There is no fixed cost in the long run. The concept of long run cost is useful for taking long term investment decisions.

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