Total cost

Total cost

In economics, and cost accounting, total cost (or total costs) describes the total economic cost of production and is made up of variable costs, which vary according to quantity produced such as raw materials, plus fixed costs, which are independent of quantity produced such as expenses for assets like buildings.

The rate at which total cost changes as the amount produced changes is called marginal cost; this is the marginal unit variable cost. If one assumes that the unit variable cost is constant, as in cost-volume-profit analysis, then total cost is linear in volume, and given by TC = FC + unit VC * N.


Marginal CostMarginal cost is the additional cost we have when we produce one more unit of the good. With the equation TC = 50 + 6Q, our total cost goes up by 6 whenever we add an additional good, as shown by the coefficient in front of the Q. So we have a constant marginal cost of 6 per unit produced.

Total CostWe already have a formulation for the total cost, which is TC = 50 + 6Q.If we want to calculate the total cost for a specific quantity, all we need to do is substitute the quantity in for Q. So the total cost of producing 10 units is 50 + 6*10 = 110.

Fixed CostOur fixed cost is the costs we incur when we do not produce any units. So we substitute in Q = 0 to our equation and we get 50 + 6*0 = 50. So our fixed cost is 50.

Total Variable CostsThese are the non-fixed costs we incur when we produce Q units. So our variable costs are:

Total Variable Costs = Total Costs – Fixed Costs.

In our case that would be 50 +6Q – 50 = 6Q. So our total variable costs are 6Q, and we can calculate our total variable costs at a given point by substituting for Q.

Average Total CostsWe are averaging our total costs over the number of units we produce. So we take our total cost formula of TC = 50 + 6Q, and divide the right hand side to get average total costs. So our average total costs are AC = 50/Q + 6Q/Q = 50/Q + 6. To get our average total cost at a specific point we just substitute for the Q. So our average total cost of producing 5 units is 50/5 + 6 = 10 + 6 = 16.

Average Fixed CostsSimilarly, we just divide our fixed costs by the number of units we produce. Since our fixed costs are 50, our average fixed costs are 50/Q.

Average Variable CostsAs you may have guessed, to calculate our average variable costs we divide our variable costs by Q. Since our variable costs are 6Q, our average variable costs are 6. Notice that our average variable cost does not depend on our quantity produced and is the same as our marginal cost. This is one of the special features of the linear model, but will not hold when we use a non-linear formulation.

ee also

* Fixed cost
* Variable cost
* Semi variable cost
* Cost-Volume-Profit Analysis
* Cost accounting

Wikimedia Foundation. 2010.

Игры ⚽ Нужен реферат?

Look at other dictionaries:

  • Total Cost — of Ownership (TCO) ist ein Abrechnungsverfahren, das 1987 durch Bill Kirwin, Research Director der Unternehmensberatung Gartner Inc., im Auftrag von Microsoft entwickelt wurde. Der Ansatz dient dazu, Verbrauchern und Unternehmen dabei zu helfen,… …   Deutsch Wikipedia

  • Total cost of ownership — (TCO) is a financial estimate whose purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system. It is a management accounting concept that can be used in full cost accounting or even ecological …   Wikipedia

  • Total cost management — (TCM) is the name given by AACE International to a process for applying the skills and knowledge of cost engineering. It is also the first integrated process or methodology for portfolio, program and project management. AACE first introduced the… …   Wikipedia

  • Total Cost of Ownership — (TCO, Gesamtbetriebskosten) ist ein Abrechnungsverfahren, das Verbrauchern und Unternehmen helfen soll, alle anfallenden Kosten von Investitionsgütern (wie beispielsweise Software und Hardware in der IT) abzuschätzen. Die Idee dabei ist, eine… …   Deutsch Wikipedia

  • total cost of ownership — UK US noun [U] (ABBREVIATION tco) ACCOUNTING ► a calculation of all the costs involved in buying and using a product over time: »Outsourcing services can dramatically cut the total cost of ownership …   Financial and business terms

  • Total Cost Of Ownership - TCO — The purchase price of an asset plus the costs of operation. When choosing among alternatives in a purchasing decision, buyers should look not just at an item s short term price, which is its purchase price, but also at its long term price, which… …   Investment dictionary

  • total cost of the credit to the consumer — bendra vartojimo kredito kaina statusas Aprobuotas sritis civilinė teisė ir procesas apibrėžtis Visos išlaidos, įskaitant palūkanas, komisinius mokesčius ir bet kuriuos kitus su vartojimo kredito sutartimi susijusius mokesčius, kuriuos vartojimo… …   Lithuanian dictionary (lietuvių žodynas)

  • Total cost of ownership — Совокупная стоимость владения (англ. Total cost of ownership, TCO) это методика, предназначенная для определения затрат на информационные системы (и не только), рассчитывающихся на всех этапах жизненного цикла системы. Упрощенная методика расчета …   Википедия

  • total cost of production — See: production cost …   Accounting dictionary

  • total cost of ownership —    Abbreviated TCO. A term first used by the Gardener Group in an attempt to quantify the real cost of a particular computer solution.    TCO encompasses the direct costs of the hardware and the software required and then adds in costs for… …   Dictionary of networking

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”