CA Foundation Exam June 2023 » CA Foundation Study Material » Business Economics » All the things you should know about the concept of cost and its kinds

All the things you should know about the concept of cost and its kinds


The best way to understand cost is by understanding that it is the sacrifice that one makes to obtain multiple services and goods. Traditionally speaking, the cost is the relationship between the production value of input and its level of output. The concept of cost is quite important to know as it helps in the running of the business, and it is an important expenditure to make. In the end, the cost is an expense. All the factors that play a part in the production of the commodity have something to do with the cost. For instance, labour costs we measure in terms of benefits and wages. The historical cost concept requires the valuation of an asset at multiple values. Such as the fixed asset cost we measure with the help of its depreciation value. To understand the concept of cost more thoroughly, you must know how many types of costs are there.

Types of Cost

  •   Fixed Cost- Such costs don’t change with the change of the output. If you change your output or you do not produce anything, the fixed cost will remain the same. Some of the examples of fixed costs under the concept of cost of capital are costs incurred when you build a factory, multiple monthly bills, insurance amounts, etc.
  •   Concept of Marginal Costing- Marginal cost is the cost that you incur in producing one extra unit of a commodity. It is an aspect of economic analysis that helps businesses to understand their finances in a better way and plan for future finances accordingly. To understand better the concept of marginal costing, you should have a thorough understanding of multiple types of costs. If you incur rs 1550 as the total cost of 3 units and the total cost of 4 units is 1990. In this situation, the marginal cost of the extra added unit is rs 350.
  •   Variable costs- are changeable costs, and they vary with the change in output and other factors. They are largely dependent upon the output produced. For instance, a variable cost is a cost that you incur when you change something in your final product. Such as, for more production of a vehicle, you require raw material. The cost you incur when you buy raw material is your variable cost.
  •   Product Cost- this kind of cost is the cost that you assign goods that are manufactured or that you purchase for resale. Such costs are incurred when you purchase a product or when you produce a product. You can easily identify product costs as they are part of the inventory, i.e. costs that you incur when you move raw materials to work in progress.
  •   Concept of opportunity cost- Opportunity cost only applies to commodities that have their alternatives or substitutes as the concept of opportunity cost is the lost opportunity or sacrificed opportunity that you make when you choose one course of action over its substitute or alternative.
  •   Sunk Cost- Sunk costs are the costs that are decisions you made in the past and ones that you cannot change. You cannot change sunken costs by making any decision in the future or present. The classic example of sunken cost is written down costs of the asset that you have purchased in the past.


With the help of the above findings and information, we can conclude that the historical cost concept requires the valuation of an asset at a nominal value. Cost analysis is an important factor to know about as it relates the financial factors of production to its physical factors. We can say that cost helps us in making decisions that are related to the prices of a commodity. Such as, all the manufacturing enterprises consider the ratio between the price and cost as markup. It is this cost that represents the difference between the selling price and the respective direct cost of the commodity. Though costs are the base of any of the pricing decisions, they act only as a starting point. It is the market condition and multiple other factors that determine the price of a commodity.


Frequently asked questions

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What do you mean by the concept of cost?

Ans: The concept of cost is one of the key concepts in economics. In simpler t...Read full

What do you mean by cost analysis?

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How many types of costs are there under the historical cost concept that requires the valuation of an asset in economics?

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Why is the concept of opportunity cost important in economics?

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How can you apply the concept of opportunity cost in our everyday life?

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