Economic Cost: Concept, Formula & Types


Historical Costs are those costs which are taken into consideration after they have been incurred. This is possible particularly when the production of a particular unit of output has already been made. They have only historical value and cannot assist in controlling costs. Abnormal Costs, on the other hand, are those costs which are not normally required for a given level of output to be produced normally, or which is not a part of cost of production. Under this condition, costs are classified according to the normal needs for a given level of output for a normal level of activity produced for such output.


Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The authentic payments undergone by an entrepreneur in employing input are known as outlay costs. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘cost.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. The Dragonfly Pro comes with a year of 24/7 Pro Live technical support, with additional support costing $10.99 a month for up to 36 months.

’ This is a common phrase that is used as a general dialect now and then. Thus, the cost is nothing but a payment of value that is given in order to utilize the service or goods. The concept of cost gives an indication of the overall resource required to avail the same. It does not allow for the scope of showing internally generated intangible assets built over time like brand loyalty, brand name, goodwill, etc. It does not take into account the fair value of the assets, and thus, it does not show the true picture of assets in the financial statement. It is a cheaper alternative as the auditor will not have to go in length to verify the recorded cost.

Cost accounting is an informal set of flexible tools that a company’s managers can use to estimate how well the business is running. Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. Individually assessing a company’s cost structure allows management to improve the way it runs its business and therefore improve the value of the firm. Since they are not GAAP-compliant, cost accounting cannot be used for a company’s audited financial statements released to the public.

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Manufacturing costs include direct materials, direct labor, and factory overhead. Controllable costs are expenses managers have control over and have the power to increase or decrease. Controllable costs are considered so when the decision of taking on the cost is made by one individual. Common examples of controllable costs are office supplies, advertising expenses, employee bonuses, and charitable donations.


___ refer to the increase in cost as a result of increasing one unit of production. For example, a company that owns a factory and doesn’t pay rent faces the implicit cost of not renting out the factory but using it for production purposes instead. Due to fluctuating market, sometimes the cost can be increased, and the profit margin is to be decreased. If the organization is in necessity goods or defence production where cost and the selling price matters so as to justify the selling price. From product or service along with a percentage of profit margin on the product or services. The success and efficiency of the firm also depends on its suitable size.

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At some point, the company finds out that the new drug has serious side effects and needs to stop producing it. Opportunity cost is the cost an individual or business incurs from choosing one alternative over the other. The cost involved drawing the cost object also to be included in operational cost hence the overall cost can be increased. Profit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales.

  • After buying wheat, the food wholesaler will set a price to sell to a bakery.
  • This concept can be used to determine the break-even analysis as well.
  • The producer allows the outflow of the money for the sale of the product.
  • The opportunity cost of going to the cinema and spending time with your friends is equal to the money you miss when choosing to go to the cinema instead of using the time to work.
  • This chapter presents the different types of costs and product costing systems.

In short, the total costs include all costs starting from cost of materials to the cost of packing the product. Product costs are costs that are incurred to create a product that is intended for sale to customers. Product costs include direct material , direct labor , and manufacturing overhead .

Marginal Costing

As we keep on charging depreciation, the unrealized gain keeps on decreasing and being realized. However, it’s limited to additional depreciation due to revaluation. The Classic Coffee can be further single step vs multi step income statemented into Royal Coffee and sold for $91.60 per pound. The additional cost of further processing the Classic Coffee into Royal Coffee is $10.15 per pound. Another consideration involves the cost of externalities—that is, the costs that are imposed either intentionally or unintentionally on others. Thus the cost of generating electricity by burning high-sulfur bituminous coal can be measured not only by the cost of the coal and its transport to the power plant but also by its cost in terms of air pollution.

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Exceptions to the principle rule of recording assets are stocks and bonds, which are recorded at their fair market values. The purpose of the cost principle is to ensure that financial statements record the original cost of a valuable asset. A company may not record what it estimates or thinks the value of the asset is, only what is verifiable. Financial assets such as stocks and bonds are excluded from cost principle as these are recorded as fair market value.

Cost accounting is a form of managerial accounting that aims to capture a company’s total cost of production by assessing its variable and fixed costs. It refers to the amount of payment made to acquire any goods and services. In a simpler way, the concept of cost is a financial valuation of resources, materials, risks, time and utilities consumed to purchase goods and services. From an economist’s point of view, the cost of manufacturing any goods and services is often said to be the concept of opportunity cost.

What Is Cost Principle?

These costs are also defined as the opportunity costs used in the various factors of production. In other words, defined in economics, the cost is the sum total of explicit cost added with implicit cost. Over the years the cost concept has evolved as more refinement was brought into the process. Urgent costs are those costs which must be incurred in order to continue operations of the firm.

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Variable Costs, on the other hand, are those which vary proportionately with the volume of output. So the cost per unit will remain fixed irrespective of the quantity produced. That is, there is no direct effect on the cost per unit if there is a change in the volume of output (e.g. price of raw material, labour etc.,). Fixed Costs are those which do not vary with the change in output, i.e., irrespective of the quantity of output produced, it remains fixed (e.g., Salaries, Rent etc.) up to a certain limit. It is interesting to note that if more units are product, fixed cost per unit will be reduced, and, if less units are produced, obviously, fixed cost per unit will be increased.

Cost Concepts

As per the cost principle, all the assets in an organisation’s financial statements should be recorded at their cost, i.e. the total expense incurred on them when they were acquired or purchased. Change in the asset’s market value or any sort of inflation does not impact its value reflecting on the balance sheet. The cost concept in economics states that all accounts are recorded in the book of accounts at their purchase price. This includes the cost of acquisition, transportation, and installation and not at its market price.

The principle is not justifiable for financial assets where the value has to be adjusted to the market value at the end of each year. It is also not appropriate for long term assets as the concept does not allow for upward revaluation of these assets, and they will never show actual market value in the long term. It is defined as the per-unit cost incurred on variable factors of production in cost concepts. A direct or traceable cost is that which can be identified easily and indisputably with a unit of operation (costing unit/cost centre). Common or indirect costs are those that are not traceable to any plant, department or operation, or to any individual final product.


Those who joined during that time did not need to pay attention to renewal notices from their states – which now could cost them their insurance. One problem for building out storage has been cost, but costs are coming down, Jacob said. But keep in mind that some alternatives to real eggs could cost the same and many options could start selling out closer to the holiday, McGrath said. However, surf anglers push their gear extremely hard, and finding a reel that is a balance between low-cost and dependability can be hard to balance. But the additional impact of social unrest, geopolitical conflict, the cost-of-living crisis, the recession, layoffs, and more have pushed people to the edge. The project will end up costing the government an estimated 3.5 billion dollars.

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They are also defined as the function of the total output during the production of commodities. The Sunk costs are those which cannot be altered, increased or decreased, by varying the rate of output. Management accountants need to understand cost concepts because they are vital in many areas of planning, control, and decision-making.

  • Profitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs.
  • A firm is required to make payments toward expenditures known as fixed costs, regardless of the particular commercial activity it engages in.
  • Some of these economic costs include capital, labor, and raw materials.
  • Managerial accounting is the practice of analyzing and communicating financial data to managers, who use the information to make business decisions.

When a transaction takes place, it typically involves both private costs and external costs. Find out the profit or incurred per pound from further processing of Classic Coffee to Royal Coffee. These expenses are channeled into retail, wholesale, and the internet. Revenues from each of the channels come after deducting the cost from sales.

A proper classification of costs is absolutely necessary to mention the costs with cost centres. Usually, costs are classified according to their nature, viz., material, labour, over-head, among others. An identical cost figure may be classified in various ways according to the needs of the firms. A product may be an incidental by-product of a production process . If so, it does not really have any cost, since its cost would have been incurred anyways as a result of the production of the main product. Thus, selling a by-product at any price is profitable; no price is too low.

The producer allows the outflow of the money for the sale of the product. After the sale of the commodity, the business gains an inflow of money. Private costs are those which are actually incurred or provided for by an individual or a firm on the purchase of goods and services from the market. For a firm, all the actual costs both explicit and implicit are private costs.