Essential Finance Terminology 1: Cost Concept in 1 line

2012-05-15T05:45:00.003+06:00

Disclaimer:
This Terminology is totally Compiled and Edited by: Md. Jasim Uddin, BBA(Finance), 11 Batch, University of Dhaka.

Cost concept in twitter size!:

Normally cost means out of pocket cost or cash expense. There are many kinds of costs in economics. They are as follows:

1. Nominal costs:

Nominal cost is the money cost of production. It is also called the cost of production.

2. Explicit costs:

Explicit costs are the paid out costs or out of pocket cost such as payment made for productive resources purchased or hires by the firm.

3. Implicit costs:

Implicit costs are the costs of self- owned and self -employed resources such as salary of the proprietor, cost of land of the owner etc.

4. Fixed cost (FC):

Fixed costs are the costs that do not vary with the output. Fixed costs represent the costs that must be paid even when the factory has been temporarily stopped. It includes rent of factory buildings, capital invested in machinery, salary of permanent staff etc.

5. Variable costs (VC):

Variable costs are the costs that vary with the output. These costs incurred only when the factory is at work. It includes of raw materials, cost of casual or daily labor employed.

6. Total costs (TC):

Total cost is the sum of fixed and variable costs. The formula for total cost is: TC = FC + VC

7. Opportunity costs:

Opportunity cost is the most valuable alternative that is given up if a particular investment is undertaken. It is slightly different from other costs; it requires us to give up a benefit.

8. Sunk costs:

Sunk cost is the cost that has already been incurred, cannot be removed, and therefore should not be considered in investment decision. In other words, a sunk cost is a cost we have already paid or have already incurred the liability to pay. Such a cost can not be changed by present or future decision to accept or reject the project.

9. Average costs (AC):

Average cost is equal to total cost(TC) divided by total number of units (Q) produced.

10. Marginal costs (MC):

Marginal cost is the cost of producing an additional unit.

11. Floatation costs:

The cost of issuing new shares or debentures. It has two components:

i. Underwriter’s spread

ii. Issuing expenses.

:BONUS:

12. Agency cost:

An agency cost is an economic concept on he cost incurred by an organization that is associated with problems such as: 1. Divergent management shareholder objectives and2. Information asymmetry.