Cost Analysis Flashcards

Flashcards for Cost Analysis Review

Why is cost analysis significant in business decisions?

The term 'cost' has different meanings under different settings and is subject to varying interpretations, making its analysis crucial in various business decisions.

What are private costs?

Costs actually incurred by a firm on the purchase of goods and services from the market including all explicit and implicit costs.

What are social costs?

The total cost borne by the society due to the production of a commodity.

What are incremental costs?

The total additional cost associated with the expansion in output.

What are sunk costs?

Expenses that have already been incurred and cannot be reversed or recovered.

Give an example of sunk costs.

Salaries for employees who have been laid off.

How are short run costs defined?

Costs that vary with variation in output, the same as variable costs.

How are long run costs defined?

Costs that are incurred on fixed assets like plant, machinery, etc.

What are direct costs?

Costs that have a direct relationship with a unit of operation, including items such as software, equipment, labor, and raw materials.

What are indirect costs?

Costs that cannot be easily traced to a product, such as electricity, stationary, and other office expenses.

What is the formula for total cost (TC)?

TC = TFC + TVC, where TFC is Total Fixed Cost and TVC is Total Variable Cost.

What is Total Fixed Cost (TFC)?

The cost of plant, building, equipment, etc., that remains fixed with a change in output.

What is Total Variable Cost (TVC)?

The cost of labor, raw material, etc., that varies with the variation in output.

What is the formula for calculating average cost (AC)?

AC = AFC + AVC, where AFC is Average Fixed Cost and AVC is Average Variable Cost, or AC = Total cost/no. of units produced.

What is Average Fixed Cost (AFC)?

Fixed cost of producing per unit of the commodity; AFC = total fixed cost / no. of units produced.

What is Average Variable Cost (AVC)?

Variable cost of producing per unit of the commodity; AVC = total variable cost / no. of units produced.

How is Marginal Cost defined?

Marginal cost is the addition to total cost when one more unit of output is produced.

What are the two aspects of the Cost-output relationship?

Cost-output relationship in the short run and cost-output relationship in the long run.

Define Short Run in the context of cost-output relationship.

A period which doesn’t permit alterations in the fixed equipment (machinery, building etc.) & in the size of the organization.

Define Long Run in the context of cost-output relationship.

A period in which there is sufficient time to alter the equipment (machinery, building, land etc.) & the size of the organization; output can be increased without any limits being placed by the fixed factors of production.

How do total cost (TC), average cost (AC), and marginal cost (MC) behave as output rises?

Total cost (TC) rises as output rises. Average cost (AC) = TC/output. Marginal cost (MC) = change in TC as a result of changing output by one unit.

What is the relationship between marginal cost (MC) and average cost (AC)?

When marginal cost exceeds average cost, average cost must be rising. When marginal cost is less than average cost, average cost must be falling.

When are Average Variable Cost (AVC) and Average Total Cost (ATC) are at their minimum points?

If MC=AVC and MC=ATC, then AVC and ATC are at there minimum points.

What defines long-run costs?

Costs over a long period of time, permitting enough change in all factors of production enabling firms to produce more and the supply of a commodity is adjusted to its demand.

What are long run cost curves also called?

Planning curve or envelope or scale curve.

What is the economic rule for production in the long run?

If selling price > ATC (or TR > TC), continue to produce and maximize profit where MR = MC. If selling price < ATC (or TR < TC), there will be a continual loss, sell fixed assets, and reinvest money in a more profitable alternative.

What are Economies of Scale?

The cost advantages that a firm obtain due to expansion.

What are examples of other sources of economies of scale?

Purchasing in bulk, managerial specialization, financial advantages (lower interest rates), marketing (spreading advertising costs), and technological advancements.

What are Diseconomies of Scale?

Increase in long-term average cost of production as the scale of operations increases beyond a certain level.

What are the factors determining the cost?

Size of plant, level of output, price of inputs, state of technology, management and administrative efficiency.

What is break-even analysis?

An analytical technique used to study the relationship between the total costs (TC), Total revenue (TR) and total profits and losses over the whole range of stipulated output.

Define what happens at the Break-even point.

At break-even point, TR = TC.