What is the total cost?

Total cost is a financial measure that includes the initial monetary spend and the opportunity cost of their choices, whether producing a product, purchasing an investment, or acquiring a piece of equipment.

The total cost includes:

Variable Cost:

The sum of all marginal costs for all units produced is known as variable costs. These are costs that change in reaction to changes in the quantity of a business’s product or service.  Variable costs, such as raw materials and labour, change over time and are frequently reliant on a company’s production output.

Fixed Cost: labour

Fixed costs stay consistent regardless of how many things the company creates. While smaller production volumes have a fixed cost, industrial economies of scale allow costs to vary and fall below that figure. Rentals are an excellent example.

The total cost is the sum of variable and fixed costs.

Calculation of Total Cost

Total Cost = Fixed Cost + Variable Cost

Understanding the Application (Cost-Volume-Profit Analysis)

• Companies can use the Total Costs to ascertain the viability of a proposition
• When a proposition shows viability to cover the overall cost required for the venture, it can be categorised as an efficient proposition, and business resources can be employed to pursue such an opportunity
• Total cost includes both fixed and variable expenses, so the addition business pressure can be ascertained to incremental variable cost
• Rent on the space utilised is fixed, and Raw material consumed as a variable cost is an example of total cost components
• Regardless matter how many units are manufactured or how many customers are supplied, the fixed cost will be the same
• Understanding the implication of zero production through fixed cost as recurring expenses
• Viability of business when you can cover more than variable expenses component of the total cost
• Total cost components help determine when to stop further production and indicate price falling below cost
• Total cost analysis can be employed to ascertain new business opportunities or additional units with the same efficacy. 

Important Concepts of Total Cost

Opportunity Cost – Opportunity Lost is the opportunity cost

The worth of what you miss when choosing between multiple or more possibilities is known as opportunity cost. When you make a decision, you believe that the outcome will be better for you, irrespective of what you lose by doing so. For an investment, opportunity cost refers to the fact that your investment decisions will always result in current and future risks and returns.

Simply put, Opportunity cost is the loss you incur in exchange for a gain, or the loss of one gain in exchange for another.

Consider whether to sell your Flat now or keep it to sell on your retirement. While it is true that an investor can protect any potential returns by selling right away, they may forfeit out any future gains.

Marginal Cost –

The marginal cost, or the addition to the overall cost resulting from the creation of an extra unit, is an important aspect of cost analysis. In theory, a company that wants to maximise profits will set its output level by increasing production until the cost of the final extra unit produced (marginal cost) approximately matches the revenue increase (marginal revenue).

Cost Curve –

The link between production and the various cost measurements required to produce the output is depicted by a cost curve. Cost curves are graphic representations of various production costs. Firms need to know how costs fluctuate with output to make money; hence cost curves are critical to profit maximisation decisions.

Cost Curves applications include:

Average variable cost curve

Average fixed cost curve

Average Marginal Cost Curve

Average Total Cost Curve

Total Cost of Ownership:

The total cost of ownership (TCO) is the total cost of owning a certain item over a specific period, and it includes both the purchase price and total recurring charges. Total cost of ownership is a derivation of the total cost, which is termed for cost analysis application.

While evaluating capabilities, companies frequently use the total cost of ownership, but they sometimes mistake focusing on TCO when evaluating potential expenditures. Instead, experts should consider the entire cost and the expected benefits of a decision based on complete cost-benefit analysis if a new purchase or opportunity has the potential to boost a company’s bottom line significantly.

Conclusion

In economic theory, total cost analysis plays a crucial role and aids various decision-making for a company. The total cost consists of fixed and variable costs, so all the studies based on these factors automatically culminate into the total cost.

In the short run, various cost curves also form an integral part of decision-making and are all derived from the study of total cost and its parts.