FIXED , VARIABLE AND INCREMENTAL

COST

Rahat Inayat Ali: 14CH23

Assigned by : Aisha Kousar

Topics:

Fixed cost.Variable cost. Incremental cost.

WHAT IS COST ??• An amount that has to be paid .

• spent to buy or obtain something.

• In business and accounting, cost is the monetary value spent by a company to produce a product. It does not include profit mark-up.

FIXED COST• Fixed costs are costs that are independent of output.

• Fixed costs are those costs that do not change based on production levels.

• These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, taxes etc.

• A fixed cost is a basic operating expense of a business that cannot be avoided .

for example: o insurance,o interest, o rent, o salaries, and wages.

VARIABLE COST

• Variable costs are costs that vary with output.

• Generally : variable costs increase at a constant rate relative to labor and capital. Variable costs may includes utilities, materials used in production, etc.

• Variable costs change according to the quantity of a good or service being produced. The amount of materials and labor that is needed for to make a good increases in direct proportion to the number of goods produced. The cost "varies" according to production.

• Variable costs includes inputs like labor and raw materials. Variable costs are also the sum of marginal costs over all of the units produced (referred to as normal costs).

• For example, in the case of a clothing manufacturer, the variable costs would be

the cost of the direct material (cloth) and the direct labor. The amount of materials and labor that is needed for each shirt increases in direct proportion to the number of shirts produced. The cost "varies" according to production.

TOTAL COST = FIXED COST + VARIABLE COST

INCREMENTAL COSTS • Incremental cost is the cost associated with

increasing production by one unit.• some costs are fixed and other variable, the

incremental cost will not be the same as the overall average cost per unit.

• Incremental costs are closely related to the concept of marginal cost.

• While marginal cost refers to the change in total cost resulting from producing an additional unit of output.

• incremental cost refers to total additional cost associated with the decision to expand output or to add a new variety of product etc.

Thank You