THE THEORY OF COST AND PROFIT

The focus of this chapter is how the Producer or yung businessman/woman can get the most amount
of profit in their business or market. Lahat naman nang negosyo ay kailangan nang puhunan or capital,
gagastos ka muna bago ka kumita, this is what we call as cost and para maging matagumpay ang isang
negosyo, the Producer needs to be guided by smart and rational decisions to help his business gain
the most profit or kita and as little lost or lugi as possible.

Ang pinaka concept nang business is cost and profit. You give and then you take.

The three main forms of business ownership are the

Sole Proprietorship kung saan iisang tao lang ang nagmamay-ari nang business. This is mostly small
businesses or family-owned businesses,

Partnership ay agreement nang dalawang tao na-mag share sa responsibilities of setting up a business
and dividing profits and losses among themselves.

Corporation is a group of people who operates the business as a single entity and recognized as such by
the law. This can be a small or big group of people, working together under one name to deliver higher
demands and attain more profit.

While two other forms exist, which are the

Cooperative Associate kung saan boluntaryong nagsasama-sama ang maraming bilang nang tao upang
makamit ang iisang goal. Ang tawag sa business model na ito ay Cooperative at Members ang tawag sa
mga kasali dito. Democratic business model sya kung saan lahat nang decision ay pinagbobotohon nang
mga Members, pati ang kanilang magiging mga Leader. And most of all, Cooperative business models ay
non-profit organizations kung saan any surplus profit in the organization is given back to communities
thru charities, donations, scholarships etc.

Business Syndicate ay ang pagsasama-sama naman nang business entities like companies or
corporations sa isang pinagkasunduang length of time upang mai-deliver ang isang malaking project and
makakuha nang mas mataas na profit. This is mostly temporary in cases kung saan hindi kayang i-
shoulder nang isang single entity ang gastusin, gumagawa sila nang deal with other companies to help
them and they will agree on a settlement where all profits earned will be divided accordingly.

General Concept

The most general concept of business is to reward entrepreneurial efforts. Businesses are made to sell
products to consumers. Yung gastos nila sa pagawa, pag-package and pag-transport nang kanilang mga
products is what we call the cost and yung kikitain nila mula sa pagbili nang mga tao nang kanilang
products is what we call as the revenue. Kapag nahigitan nang revenue ang cost of production, ang
positive difference nito ang tinatawag na nating profit sa business.
Cost Concepts

(1) Specific Framework

Any business will have a stock of assets that they can use to produce their products that
will reflect the use of these resources. Assets of a company can come in real assets
which are the physical properties of the business like machineries, buildings, materials
and supplies. While monetary assets are those in the form of money or near money
(assets that can be quickly converted to cash like bank deposits etc.)

A business or firm is said to only incur cost (gumastos) if they have used their assets for
the production of their goods. Hindi considered na cost ang desisyon nang isang
business na mag-expand tulad nang pagbili nang mas malaking space or nang bagong
machinery, this is more considered as the giving up of present values (assets) to help the
production process. The acquisition of new assets is not a cost, but the utilization or
paggamit nang mga ito, katulad nang paggamit nang machine sa factory, yung kuryente
na babayaran mo para doon at para sa nag-ooperate nun ay considered as cost. Hindi
rin considered na cost ang unsold goods nang isang business/firm dahil may
pagkakataon pang ito ay mabenta in the future, so napupunta ang mga extra stock na
ito sa category of inventories nang business/firm.

Sa Table 7.1 makikita ang ibat-ibang klase pa nang costs na ginagastos nang isang
business para sa full operation nang production of their sales.

(2) Imputed and Opportunity Costs

Imputed Costs are also called hidden costs or implicit costs of the business/firm.
Imputed costs are not expenditures, but it is a cost of production. Put simply, these are
instances where the company uses its own assets to gain some benefits but therefore
gives up all other possible alternatives of income. For example, ang isang business ay
nagmamay-ari nang isang building na ginamit na rin nilang production plant nila, instead
of renting it to other people. Nakalibre nga nang upa ang business sa production nila
pero yung income na supposedly makukuha nila kung pina-renta nila yun ay imputed
cost na.

Opportunity Costs An opportunity cost is the economic concept of potential benefits

that a company gives up by taking an alternative action. In other words, this is the
potential benefit you could have received if you had taken action A instead of action B.
Lahat naman nang decision sa business ay may benefits, so its just a matter of choosing
which benefits of an action would you rather lose in order to gain the benefits that you
aim. Opportunity Costs are not physical losts but rather theoretical costs or missed
opportunities.
 Para malaman if profit or loss ang na-gain sa isang business decision,
The relationship explains

If P1 > C0 then P2 is +
If P1 < C0 then P2 is
P2 = P1 C0

P1 profit na walang opportunity cost

C0 Opportunity cost
P2 profit na mayroong opportunity cost

So, for example from table 7.1

(Original Decision) Net profit na walang Opportunity Cost = 1,175,352Php

(Alternative Decision) Net profit with Opportunity Cost = 382,861Php
Opportunity Cost = 792,491Php LUGI

382,861Php = 1, 175,352Php 792, 491Php

1, 175,352Php > 792, 491Php Opportunity Cost is (+) which means there is higher
loss in the alternative decision than there was in the original decision.

BOTTOMLINE: If pinili mo yung Original Decision, kikita ka sana nang 1,175,352Php, but
if pinili mo yung Alternative Decision, kikita ka lang nang 382,861Php, which means yung
Opportunity Cost mo ang 792,491Php, or nalugi sayo.

(3) Cost-Output Relationship in the Short Run

Ang cost-output relationship in the short-run ay nagbabago lamang sa variable inputs

katulad nang raw materials, sweldo, etc. samantalang ang inputs tulad nang lupa,
buildings at plant and machinery ay mananatiling fixed. Dahil ito sa cost concept na ang
short-run ay hindi mahaba enough to expand yung quantity nang fixed inputs. Under
nang short run concepts ay ang Total Cost (TC), o ang kabuong halaga nang pag-
proproduce nang isang bilang nang mga producto (halimbawa: halaga nang
production nang 10,000 piraso nang sabon) ito ay nabubuo nang dalawang elements
which are the Total Fixed Cost (TFC), o kabuong halaga nang mga gastusin na di
nagbabago (Halimbawa: renta sa building) at ang Totoal Variable Cost (TVC), o
kabuong halaga nang mga gastusin na maaring magbago ukol sa dami nang prino-
produce (Halimbawa: ang pag-produce nang 1,000 sabon ay nagkakahalaga nang
30,000 pesos, samantalang ang pag-produce nang 3,000 sabon ay magkakahalaga na
nang 50,000 pesos dahil dadami ang materials na kakailanganin at taong papasahurin
upang matapos ang bilang nang demand na kinakailangan)
 Ang total fixed cost (TFC) ay hindi influenced nang level of activity or dami nang prino-
produce sa isang negosyo. Habang ang total variable cost (TVC) naman ay tumataas
base sa dami nang prino-produce at bumababa base sa unti nang prino-produce.

So in the short-run an increase in total cost (TC) only means na tumaas ang TVC
pero never ang TFC

TC = TFC + TVC
TFC = TC TVC
TVC = TC TFC
TC = TFC when the output is zero.
The graph below shows Short-run cost output relationship.

TC is always equal to
TFC if walang
production (output)

Tumataas habang
dumadami yung output

COST
(Gastos)

Never nagbabago
kahit gaano kadami ang
prino-produce

OUTPUT
(Dami nang prino-produce)
Marginal Cost
Marginal Cost ay pagbabago sa Total Cost(TC). Ito ay
naapektuhan lamang nang pagbabago sa Total Variable
Cost(TVC).

TC = TVC, dahil ang kahit anung pagbabago

sa TC ay nanggagaling lamang sa TVC, dahil
never nagbabago ang TFC.

- symbol nang change or pagbabago sa amount

Q Dami nang prinoduce (output)

MC = MVC dahil TC = TVC.

Or Marginal Cost (MC) is
equals to Marginal Variable
Cost (MVC) dahil equals lang
naman ang pagbabago sa Total
Cost and Total Variable Cost
kahit gaano kadami ang
prinoproduce (output).

Pagbabago sa presyo nang Total

Cost and Total Variable Cost na
nirereflect nang Marginal Cost
and Marginal Variable Cost.
Halimbawa:

Gumawa ka nang
1 quantity or
isang sabon lang,
ang TVC mo ay 5
pesos lang at ang
TC mo ay 45
pesos lang dahil:
TC = TFC + TVC
45 = 40 + 5

Pero, kung
gumawa ka nang
2 quantity or
dalawang sabon,
ang TVC mo na ay
8.5 pesos at ang
TC mo ay 48.5
pesos na.

Marginal Cost
is the difference
between them.

So, kunin mo
yung TVC and TC
sa QUANTITY 1
and QUANTITY 2
and i-subtract mo
sila.

5 - 8.5 = 3.5
45 48.5 = 3.5
Average Cost
Average Fixed Cost (AFC): Average fixed cost is obtained by dividing the TFC by the number of
units produced. Thus:

AFC = TFC/Q where, Q refers quantity of production.

Since TFC is constant for any level of activity, yung fixed cost per unit ay patuloy na
bumababa habang dumadami ang output. Kaya ang AFC curve ay pababang slope papunta sa kanan at
mayroon agad mabilis na pagbagsak sa umpisa nang pagdami nang outpout.
Average Variable Cost (AVC): Average Variable Cost is obtained by dividing the TVC by the
number of units produced. Therefore:

AVC = TVC / Q

Due to the operation of the Law of Variable Proportions ang AVC curve ay magiislope
pababa nang pababa hanggang ma-reach nito ang certain level nang outputs kung saan maguumpisa
naman syang tumaas.
Average Total Cost (ATC): Average Total Cost or simply Average Cost is obtained by dividing the
TC by the number of units produced. Thus:

ATC = TC / Q

Simultaneously, pwede mong makuha ang values na ito thru the formulas
ATC = TC/Q TC = ATC x Q
AFC = TFC/Q TFC = AFC x Q
AVC = TVC/Q TVC = AVC x Q
Also,
ATC = TFC/Q + TVC/Q
ATC = AFC + AVC
AFC = TFC/Q

40 = 40/1

20 = 40/2

13.33 = 40/3

10 = 40/4

TFC = AFC x Q

40 = 40 x 1
40 = 20 x 2

AVC = TVC/Q

5 = 5/1

4.25 = 8.5/2

3.66 = 11/3

3.25 = 13/4

TVC = AVC x Q

5=5x1
8.5 = 4.25 x 2

ATC = TC/Q

45 = 45/1

24.25 = 48.5/2

16.99 = 51/3

13.25 = 53/4

TC = ATC x Q

45 = 45 x 1
48.5 = 24.25 x 2
MC is based on the Law of Variable Proportions. A downward trend in MC curve shows decreasing
marginal cost (i.e. increasing marginal productivity) of the variable input. Similarly an upward trend in
MC curve shows increasing marginal cost (i.e. decreasing marginal productivity). MC curve intersects
both AVC and ATC curves at their lowest points.

The relationship between AVC, AFC, ATC and MC can be summed up as follows.

1. If both AFC and AVC fall ATC will also fall because ATC = AFC + AVC

2. When AFC falls and AVC rises (a) ATC will fall where the drop in AFC is more than the rise in
AVC (b) ATC remains constant if the drop in AFC = the rise in AVC, and (c) ATC will rise where the drop in
AFC is less than the rise in AVC.

3. ATC will fall when MC is less than ATC and ATC will rise when MC is more than ATC. The lowest
ATC is equal to MC.