ANALYSIS OF COSTS

INTRODUCTION
Firms must pay for their inputs: Land ,
Labor etc.
Profitable businesses are acutely aware of
this simple fact as they determine their
production strategies, since every rupee of
unnecessary costs reduces the firms
profits by that same rupee.
2

INTRODUCTION
Costs affect input choices, investment
decisions, and even the decision of
whether to stay in business.
Is it cheaper to hire a new worker or to pay
overtime?
To open a new factory or expand an old
one?
To invest in new machinery domestically
or to outsource production abroad?
3

Fixed Costs
Fixed costs remain the same even if
output changes. ( They are costs that
must be paid on a regular basis.)
There is a minimum charge for the
telephone and utilities that must be paid
every month whether they are used or not.
4

Fixed Costs

Bank loan &

Interest repayment

Rent &
Mortgage
payments
Salaries

Electricity, telephone, insurance

Machinery & equipment

5

Variable Costs
Variable costs are costs that change with
production or sales.
The costs of raw materials increase as
more of a product is produced (made).
Labour costs (wages) also increase with
production as more workers are needed.
Utility (electricity, water, telephone) costs
may increase also.
6

Question
1. What is the difference between
and variable costs?

fixed

Fixed costs do not change variable

costs change with the increase and
decrease of output or sales.

Question
2. Fixed or variable?
- rent
fixed
- raw materials
variable
- salaries
fixed

- machinery
fixed
- wages
variable
- telephone
fixed and variable

TOTAL COST
Total cost represents the lower total dollar
expense needed to produce each level of
output.
Total Cost rises as quantity rises

10

MARGINAL COST
Marginal cost (MC) denotes the extra or
additional cost of producing 1 extra unit of
output.
A firm is producing 1000 compact discs for
a total cost of $10,000. If the total cost of
producing 1001 discs is $10,006, then
Marginal cost of production is $6 for the
1001 discs.
11

12

13

AVERAGE COST
Average Cost is the total cost divided by
the total number of units produced.

14

AVERAGE FIXED COST

15

AVERAGE VARIABLE COST

16

17