Importance and Need for cost analyses

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Cost is important aspect in business decision. There are different types of cost:

Opportunity cost: It is the most important and useful concept of economic analysis. Opportunity cost is known as the amount that is foregone in choosing an activity over the next best alternative.

Explicit and Implicit cost: Explicit costs are involved in actual payment to the other parties. Implicit costs are known as the value of foregone opportunities. It is not involve in an actual payment. Implicit costs are also important as the explicit costs. Sometimes implicit costs are neglected.

Sunk, incremental cost and marginal cost – Sunk costs are known as fixed costs. It is known as irrelevant costs also in daily decision making. Incremental cost is known as total additional cost of implementing managerial decision. Managerial costs are known as total cost which is associated with one unit change in output.

Incremental cost is the most important cost in real world’s business. It is applicable in real business world.

Direct and Indirect cost: Direct costs are known as the direct attribute to production of a particular product. On the other hands, indirect costs are those costs which are incurred on stationary, electricity bills, administrative expenses etc. These can’t be separated accurately or easily into individual units of production.

Fixed and Variable cost: Fixed costs incurred when output is zero. It doesn’t vary with changes in output. Variable costs change with change in output. It increases when out is increased. It decreases when out put is decreased.

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