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Costs  The word costs means expenditure. It refers to the money spent on an item or for a specific purpose or cause.

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Presentation on theme: "Costs  The word costs means expenditure. It refers to the money spent on an item or for a specific purpose or cause."— Presentation transcript:

1 Costs  The word costs means expenditure. It refers to the money spent on an item or for a specific purpose or cause.

2 Cost concepts Capital cost It refers to the expenditure incurred on land, buildings, vehicles, machineries and equipments, farm or firm infrastructure, etc. Variable cost  It is the cost incurred on an item or input which varies with the level of output.  Manure, Lime, fertilizer, feed, cost of fingerlings, fuel, power, wages, etc. are examples of some items of variable costs.

3 Fixed cost  It is the cost incurred on an item which does not vary with the level of output.  It consists of the following five components. (i) Depreciation (ii) Interest on capital and variable costs (iii) Repairs and Maintenance (iv) Taxes (v) Insurance premium  The components are denoted as DIRTI - 5.

4  It is the cost incurred on an item which does not vary with the level of output.  It consists of the following five components. (i) Depreciation (ii) Interest on capital and variable costs (iii) Repairs and Maintenance (iv) Taxes (v) Insurance premium  The components are denoted as DIRTI - 5.

5 Total cost It is the sum of variable and fixed costs. Junk cost It is the value of an item which has become unfit for use due to wear and tear. Average cost It is total cost divided by total output. It gives the mean cost of producing one unit of the output.

6 Marginal cost  It is the cost incurred on one more or additional unit of the product. Opportunity cost  It is the next best alternative foregone.

7 Income concepts  It refers to the sale proceeds of a farmer or firm. There could be many sources of income, apart from the sale proceeds from the products manufactured by a firm.

8 Generally income or Total Income of a farm is obtained as follows: Total Income = Total Yield (kg) x Unit price (Rs/per unit of output) Net Income = Total Income-Total Cost Average Income = Total income Yield Marginal income is the income obtained from one additional unit of the output.

9 Cost – benefit ratio It indicates the returns on a rupee of investment or expenditure. It reflects profitability of an economic activity. It is estimated on two-bases, on the basis of variable cost as well as total cost.

10 Total income Cost - benefit ratio = (Variable cost basis) Total variable cost Total income Cost - benefit ratio = (Total cost basis) Total cost A cost – benefit ratio of over 1 indicates that the activity is profitable.

11 Break – even analysis  When the marginal return or income equals marginal cost then break-even point is reached.  It is the level of no-profit or no-loss. When marginal income is more than marginal cost, then, profit increases.  But if the marginal cost is more than marginal income, then, profit decreases and loss is incurred.

12  In order to know the break – even volume, we need to divide the fixed cost by the contribution margin per unit.  The break- even point is calculated using the following formula: Fixed cost Break-even point = Contribution margin per unit

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