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Unit 9: Cost Concepts

Notes

Caselet Input Costs and Profi t Levels of Maruti Udyog Ltd (MUL)

aruti currently dominates India’s small car market and has a share of more than
80 per cent in its overall car market. MUL, a 50:50 joint venture between the
MIndian government and Japan’s Suzuki Motors Corporation posted net profi t of
` 6510 crores in 1997-98 (April - March) compared with ` 5,100 crores in the previous year.
But MUL could find it difficult to maintain its profit levels because of soaring input costs

and a slowdown in the market. Input costs had risen substantially due to the imposition
of a special additional duty, an increase in levies on cold rolled steel and a restriction on
reclaims of value-added tax to 95 per cent of the amount. Due to the slowdown in the
market and increasing competition, it will be very difficult to pass on the cost increase to

customers, thus, leading to a squeeze on margins.
9.2 Short Run and Long Run Costs

The short run is a period of time in which the output can be increased or decreased by changing
only the amount of variable factors such as labour, raw materials, chemicals, etc. In the short run

the firm cannot build a new plant or abandon an old one. If the firm wants to increase output in

the short run, it can only do so by using more labour and more raw materials.

Long run, on the other hand, is defined as the period of time in which the quantities of all factors

may be varied. All factors being variable in the long run, the fixed and variable factors dichotomy
holds good only in the short run. In other words, it is that time-span in which all adjustments and
changes are possible to realise.
Short run costs are those costs that can vary with the degree of utilisation of plant and other fi xed
factors. In other words, these costs relate to the variation in output, given plant capacity. Short
run costs are therefore, of two types: fixed costs and variable costs. In the short run, fi xed costs

remain unchanged while variable costs fluctuate with output.

Long run costs in contrast are costs that can vary with the size of the plant and with other facilities

normally regarded as fixed in the short run. In fact, in the long run there are no fixed inputs and
therefore, no fixed costs, i.e., all costs are variable.

9.2.1 Costs in Short Run
The short run cost-output relationship refers to a particular scale of operation or to a fi xed plant.
That is, it indicates variations in cost over output for the plant of a given capacity and their
relationship will vary with plants of varying capacity.
For decision-making, one needs to know not only the relationship between total cost and output
but also separately between various types of costs and output. Thus, the short run cost-output
relationship needs to be discussed in terms of:
1. Total cost and output

2. Average costs and output
3. Marginal cost and output.

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