Beruflich Dokumente
Kultur Dokumente
COST-OUTPUT
Submitted To: Submitted By:
Ms. Sakshi Sharma Dheeraj Rawal
Associate Professor MBA (1st Year)
OVERVIEW
• INTRODUCTION
The theory of costs deal with the behaviour of costs in relation to change in output.
JOEL
DEAN(ECONOMIST)
In 1936, Joel Dean pioneered the study of cost output behaviour in industry and
depicted that the total cost increase with the output.
Since then a large number of studies have been done in this field.
Total Variable Cost (TVC) is the sum of amounts spent for each of the variable inputs
used.
Total Cost (TC)
TC changes with the change in level of output as
there is a change in TVC.
Total Cost (TC) involves the sum of the total fixed costs and total variable costs.
Total Cost = TFC + TVC
Average Fixed Cost (AFC)
It refers to the per unit fixed costs of
production.
As shown in figure, short run total costs curve; STC1, STC2 and STC3 are shown
depicting different plant sizes. The LTC curve is made by joining the minimum points of
short run total cost curves. Therefore LTC envelopes the STC curve.
Long Run Average Cost – A Traditional Approach
Long Run Average Cost is equal to long run
total costs divided by the level of output. The
derivation of long run average costs is done
from the short run average cost curves.
Suppose there are three sizes of the plant and no other size of plant can be built. In short run, the
plant sizes are fixed thus organization increase or decrease the variable factor. However in the
long run the organization can select amongst the plants which help in achieving minimum possible
cost at a given level of output.
Modern Approach to Long Run Cost Behaviour: The L shaped Scale Curve
• Produce at Lower Cost: Implies that as output increases, the efficiency of the organization
improves and thus, it lowers the costs.
Long Run Marginal Cost (LMC)
If perpendiculars are drawn point A, B & C respectively, then they would intersect SMC curve at P,Q
and R respectively. By joining P, Q and R, the LMC curve would be drawn. It should be noted that
LMC equals to SMC, when LMC is a tangent to the LAC. OB is the output at which:
SAC2 = SMC2 = LAC = LMC
We can also draw the relation between LMC and LAC as follows:
When LMC < LAC, LAC falls
When LMC = LAC, LAC is constant.
When LMC > LAC, LAC arises.
PURPOSE OF SHORT RUN AND LONG RUN COST
ESTIMATION
Short run function tells the behaviour of marginal cost, which helps
us in determining output and price.
Long run cost function helps us in determining the most efficient size
of plant.
Short run function assume that it is the variable inputs influence cost.
Long run cost function allows for changes in all inputs, even capital can also
change along with other factors.
METHODS OF
ESTIMATING
COST
FUNCTIONS
Y2 - Y1
= Variable cost per unit
X2 - X1
SCATTERGRAPH METHOD
• Creating a scatter graph is another method
of estimating fixed and variable costs. It
provides a visual picture of the total costs
at different activity levels. However, it is
often hard to visualize the cost equation line
through the data points, especially if the
data is varied.
Rise
= Variable cost per unit
Run
where, A is a fixed cost, X1,X2,XN are cost drivers; b1,b2 bn are changes in cost with the change in
value of cost driver.
PROBLEMS IN THE ESTIMATION OF COST
FUNCTION
Time period
Cost adjustments
Technical