02-02-2012, 03:53 PM
Classification of Costs
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There are several types of costs that a firm may consider relevant under various circumstances. Such costs include:
Actual Costs and Opportunity Costs:
Actual costs are the costs which the firm incurs while producing or acquiring a good or a service like the cost on raw materials, labor, rent, interests etc. The actual costs are also called the outlay costs or acquisition cost or absolute cost.
On the other hand, opportunity costs or alternative costs are the return from the next best alternative use of the firm’s resources which the firm forgoes in order to avail of the return from the best use of resources.
Example for Opportunity Cost:
Machine A: produces 50,000 returns
Machine B: produces 70,000 returns
.Where the firm prefers machine B as it gives more return. So the opportunity cost is 50,000.
.The difference between the actual cost and the opportunity cost is called economic profit or economic rent.
Sunk Cost and Outlay Cost:
Sunk cost is otherwise known as DEPRICIATION, which are not altered by a change in quantity and can not be recovered.
On the other hand, outlay costs means the actual expenditure incurred for producing or acquiring goods or services. These costs are also known as absolute costs. Hence, sunk costs are the part of outlay costs.
. Explicit (Paid-out) Costs and Implicit (Imputed) Costs:
Explicit costs are those costs which are actually paid by the firm, which is also called paid-out costs.
