# THEORY OF COST

## TOTAL COST(T.C)

Is the cost incurred in of his business production of a given output. Tc = Fc+Vc.

## VARIABLE COST (V.C)

This includes the cost of buying raw materials and the cost of labour. It changes with output rises, the variable cost also rises. V.c. = T.c.-Fc.

## AVERAGE COST (A.C)

This is the total cost of producing a commodity by a firm divided by the number of units of output. Ac= ∆TCQty .

## MARGINAL COST (M.C)

This is a change in the total cost of production brought about by a unit change in the quantity of output. It is the extra cost of increasing output by one unit. MC=TcTo

## FIXED COST (F.C)

Is the cost that does not change with output. E.g.  Cost of machines and building. Fc=Tc- Vc.

## AVERAGE FIXED COST (AFC)

This is the fixed cost divided by the output since Fc is constant and AFC gives a steady falling value as output increases.

### DISTINCTION BETWEEN ACCOUNTANTS’ VIEW AND ECONOMISTS’ VIEW OF COST THEORY

The concept of cost entails differently from the two scholars. The Accountants sees cost in terms of money cost. That is to say that accountants see cost as the actual amount of money paid for a particular item while the economists see cost in terms of alternative forgone in order to satisfy the need for a particular item. (see opportunity cost for more).

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