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STANDARD COSTING Standard costing is a cost accounting technique which compares the results of actual production with the basic standard, as anticipated, in terms of costs so as to determine the reasons for discrepancies between the anticipated and actual costs. ACCORDING TO W W BIGG “Standard costing discloses the cost deviations from standard and classifies…
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EXPLICIT VS IMPLICIT COSTS The difference between Explicit vs Implicit costs are as follows: EXPLICIT COSTS Explicit costs refer to all those expenses made by a firm to buy goods directly. They include, payments for raw material, taxes and depreciation charges, transportation, power, high fuel, advertising and so on. According to Leftwitch, “Explicit costs are…
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RELATIONSHIP BETWEEN AC AND MC AVERAGE COST Average total cost is the sum of the average fixed cost and average variable cost. Alternatively, ATC is computed by dividing total cost by the number of units of output. Therefore, ATC or AC = AFC + AVC =TC/Q Average cost is also known as unit cost, as…
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MODERN THEORY OF COST Modern economists including Stigler, Andrews and Friedman have questioned the validity of U-shaped cost curves both theoretical as well as on empirical grounds. Also the long run costs in modern theory are not U- shaped but L- shaped. The Modern theory suggests the existence of ‘built- in- reserve capacity ‘which imparts…
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TRADITIONAL THEORY OF COST Traditional theory distinguishes between the short run and the long run. The short run is the period during which some factors is fixed; usually capital equipment and entrepreneurship are considered as fixed in the short run. The long run is the period over which all factors become variable. SHORT-RUN TRADITIONAL THEORY…
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WHAT IS COST? Cost refers to an amount to be paid or given up for acquiring any resource or service. In economics, cost can be defined as a monetary valuation of efforts, material, resources, time and utilities consumed, risks incurred, and opportunity forgone in the production of a good or service. CONCEPT OF COSTS There…
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ECONOMIES AND DISECONOMIES OF SCALE Economies and Diseconomies of scale arises due to law of returns to scale. Economies of scale are defined as the cost advantages that an organization can achieve by expanding its production in the long run. In other words, these are the advantages of large scale production of the organization. The…
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LAW OF RETURNS TO SCALE Returns to scale tells how production changes in response to an increase in all inputs in the long run. An industry can exhibit constant returns to scale, increasing returns to scale or decreasing returns to scale. In the long- run, there is no fixed factor; all factors are variable. The…
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LAW OF CONSTANT RETURNS The law of constant returns is also empirically valid and operates in the transitional stage between the Law of Diminishing Returns as well as The Law of Increasing Returns. According to the Law, when in order to increase output, units of labour and capital are increased; output and cost also increase…
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LAW OF DIMINISHING RETURNS Diminishing returns, also called law of diminishing returns or principle of diminishing marginal productivity, is an economic law stating that if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or…
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