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Managerial Economics




                    Notes
                                          Example: If the price of bronze at the time of purchase, say, in 1974, was   15 a kg and if
                                   the present price is   18 a kg, the original cost of   15 is the historical cost while   18 is replacement
                                   cost. Replacement cost means the price that would have to be paid currently for acquiring the
                                   same plant.

                                   Explicit Costs and Implicit or Imputed Costs (Accounting Concept of Cost and
                                   Economic Concept of Cost)

                                   Explicit costs are those expenses which are actually paid by the firm (paid-out-costs). These costs
                                   appear in the accounting records of the firm. On the other hand, implicit costs are theoretical
                                   costs in the sense that  they go unrecognised by the accounting system. These costs may be
                                   defined as the earnings of those employed resources which belong to the owner himself.

                                   Actual Costs and Opportunity Costs


                                   Actual costs mean the actual expenditure incurred for acquiring or producing a good or service.
                                   These costs are the costs that are generally recorded in books of account, for example, actual
                                   wages paid, cost of materials purchased, interest paid, etc.




                                     Notes    The concept of opportunity cost occupies a very important place in modern
                                     economic analysis. The opportunity  costs or  alternative costs  are the returns from the
                                     second best use of the firm's resources which the firm forgoes in order to avail itself of the
                                     returns from the best use of the resources. To take an example, a farmer who is producing
                                     wheat can also produce potatoes with the same factors. Therefore, the opportunity cost of
                                     a quintal of wheat is the amount of the output of potatoes given up. Thus, we find that the
                                     opportunity cost of anything is the next best alternative that could be produced instead by
                                     the same factors or by an equivalent group of factors, costing the same amount of money.
                                     Two points must be noted in this definition. Firstly, the opportunity cost of anything is
                                     only the next best alternative foregone. Secondly, in the above definition it is the addition
                                     of the qualification "or by an  equivalent group of factors costing the same amount of
                                     money".

                                   Direct (or Separable or Traceable) Costs and Indirect (or Common or Non-traceable)
                                   Costs

                                   There are some costs which can be directly attributed to the production of a unit of a  given
                                   product. Such costs are direct costs and can easily be separated, ascertained and imputed to a unit
                                   of output. This is because these costs vary with the output units. However, there are other costs
                                   which cannot be separated and clearly attributed to individual units of production. These costs
                                   are, therefore, classified as indirect costs in the accounting process.

                                   Shut-down and Abandonment Costs

                                   Shut-down costs are required to be incurred when the production operations are suspended and
                                   will not be necessary if the production operations continue. When any plant is to be permanently
                                   closed down, some costs are to be incurred for disposing off the fixed assets. These costs are
                                   called abandonment costs.








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