Cost And Production

Cost, in common usage, the monetary value of goods  and services that producers and consumers purchase.
In a basic economic sense, cost is the measure of  the alternative opportunities foregone in the choice of one  good or activity over others.
This fundamental  cost  is  usually  referred  to  as opportunity cost.

Types of Costs
Fixed Costs (FC)
Variable Costs (VC)  
Semi-Variable Cost  
Total Costs (TC)
Marginal Costs  
Opportunity Cost
Economic Cost.
Accounting Costs

where Average Cost Curves
ATC (Average Total Cost) = Total Cost / quantity
AVC (Average Variable Cost) = Variable cost / quantity  MC = Marginal cost.
AFC (Average Fixed Cost) = Fixed cost / quantity

Average Cost
Definition:
The Average Cost is the per unit cost of production  obtained by dividing the total cost (TC) by the total output  (Q).
By per unit cost of production, we mean that all the fixed  and variable cost is taken into the consideration for  calculating the average cost.
Thus, it is also called as Per Unit Total Cost
Symbolically, the average cost is expressed as:
AC = TC/Q
AC  =  Average  Variable  Cost  (AVC)  +  Average  Fixed  cost (AFC)
Where,
Average Variable Cost = Total Variable Cost | Total output(Q)  Average Fixed Cost = Total Fixed Cost | Total output(Q)

Marginal Cost
Marginal cost represents the incremental costs incurred  when producing additional units of a good or service.
It is calculated by taking the total change in the cost of  producing more goods and dividing that by the change in  the number of goods produced.
Formula for Marginal Cost
The Marginal Cost Formula is:
Marginal Cost =  (Change in Costs) / (Change in Quantity)
The Relation between the Average and  Marginal Cost Curve
The relationship between the marginal cost and average  cost is the same as that between any other marginal-  average quantities.
When marginal cost is less than average cost, average  cost falls and when marginal cost is greater than average  cost, average cost rises.
(1) When AC Falls, MC is Lower than AC:
When average cost falls, marginal cost is less than AC.  In Table 8, AC is falling till it becomes Rs.8, and MC  remains less than Rs.8.
AC is falling till point E, and MC continues to be lower  than AC.
In this case, marginal cost falls more rapidly than the  average cost. That is why when marginal cost (MC) curve is  falling, it is below the average cost (AC) curve.
(2) When AC Rises, MC is Greater than AC:
When average cost starts rising, marginal cost is greater  than average cost.
When AC rises from Rs.8 to Rs.9, MC rises from Rs.8 to  Rs.16. In Fig. 9, AC starts rising from point E. And, beyond  E, MC is higher than AC.
(3) When AC does not Change, MC is Equal to AC:
When average cost does not change, then MC = AC.  It happens when falling AC reaches its lowest point.  At the 7th unit, average cost does not change.
It sticks to its minimum level of Rs.8. Here, marginal cost  is also Rs.8.
MC curve is intersecting AC curve at its minimum point E.

Meaning of Cost Sheet:
Cost  Sheet  is  a  statement  which  presents detailed information relating to the various stages of cost.
It also shows the total cost of the product manufactured  during a particular period of time.
Thus, the cost sheet is prepared for a particular period  of time monthly, quarterly, yearly etc.

Objects of Preparing a Cost Sheet
The total cost and cost per unit of the product can be  ascertained;
It helps the management to fix up the selling price on  the basis of the cost per unit of the product after charging  certain percentage of profit on cost;
It also helps the management presenting a comparative  study of current cost with the existing cost per unit;
After proper comparison the management can take the  corrective measures;

Method of Preparation of Cost Sheet:
Step  I  =  Prime  Cost  =  Direct  Material  +  Direct  Labour  +  Direct Expenses.
Step  II  =  Works  Cost  =  Prime  Cost  +  Factory/Indirect  Expenses.
Step  III  =  Cost  of  Production  =  Works  Cost  +  Office  and  Administration Expenses.
Step  IV  =  Total  Cost  =  Cost  of  Production  +  Selling  and  Distribution Expenses. Profit = Sales – Total Cost.

Unit Cost
A unit cost is a total expenditure incurred by a company  to produce, store, and sell one unit of a particular product or  service.
Unit costs are synonymous with cost of goods  sold (COGS).
Unit cost is a crucial cost measure in the operational  analysis of a company.
Identifying and analyzing a company’s unit costs is a  quick way to check if a company is producing a product  efficiently.

Accounting for Unit Costs
Private and public companies account for unit costs on  their financial reporting statements.
All  public  companies  use  the  generally  accepted  accounting principles (GAAP) accrual method of reporting.¹  These  businesses  have  the  responsibility  of  recording  unit costs at the time of production and matching them to revenues through revenue recognition.
As such, goods-centric companies will file unit costs as  inventory on the balance sheet at product creation.
When the event of a sale occurs, unit costs will then be  matched  with  revenue  and  reported  on  the  income statement.

Production Function
To understand production and costs it is important to  grasp the concept of the production function and  understand the basics in mathematical terms.
We break down the short run and long run production  functions based on variable and fixed factors.

Production function may be classified into two:
1)Short-run  production  function  which  is  studied  through Law of Variable Proportions
2)Long-run  production  function  which  is  explained  by  Returns to Scale

Short-run production function –The law of variable proportions
The law examines the relationship between one variable  factor and output, keeping the quantities of other factors  fixed.
Definition
As the proportion of one factor in a combination of  factors is increased, after a point, first the marginal and  then the average product of that factor will diminish.

Long-run production function – Returns to Scale
In the long run, all factors can be changed. Returns to  scale studies the changes in output when all factors or  inputs are changed.
An increase in scale means that all inputs or factors are  increased in the same proportion.