Costs

COSTS

by Anton Antonio

April 5, 2015

Defining costs as an amount that has to be paid or spent to buy or obtain goods or services is oversimplifying things.  There really is more to an oversimplified meaning to the term “costs” as we have been used to.  The context of the term “costs” becomes complex when taken with other economic and management terms.  But why is “costs” an important consideration in the study of environment and natural resources management?  We have to realize that environmental goods and services do not come for free; and, therefore, they have costs especially the tangible benefits we enjoy from Mother Earth.

To highlight the complexity of the term “costs”, please consider the following terms:

1. COST OF PRODUCTION (COP) – a cost incurred when manufacturing and/or producing a good or performing a service.  Production costs combine raw material and labor.  Cost per production unit is computed by dividing the number of units produced against the total money spent to buy or obtain something.  COP also refers to the total payments made for the inputs of production to be able place a good or service in the market.  COP, however, in the economic sense, refers not only to the expenditures in producing a good or service; it also includes all costs of inputs used (capital, materials and labor).
2. ALTERNATIVE COST PRINCIPLE (ACP) or OPPORTUNITY COST (OC) – a value, profit or benefit of something that must be given up to acquire or achieve something else.  The ACP or OC is the value of the best alternative foregone in a situation where a choice has to be made between several mutually exclusive alternatives given a limitation in resources.  OCs are fundamental costs in economics and are used in computing cost benefit analysis of a business activity.
3. EXPLICIT COSTS (EC) – are direct payments made to others in the course of running a business such as wages, rent, materials, etc.  EC is the opposite of implicit cost (IC).
4. IMPLICIT COSTS (IC) – in economics, is also called (a) imputed cost, (b) implied cost, (c) or notional cost.  IC is the opportunity cost equal to what must be given up in order to use factors of production which is already owned; and, therefore, does not pay rent and such other related expenditure.  IC of production are costs of owned resources that are used in production.  It is the opposite of EC.
5. FIXED COSTS (FC) – are costs incurred in production that do not change even if the quantity produced or output is changed.  FC are expenses that have to be paid that are independent of the volume of business activity.
6. VARIABLE COSTS (VC) – are costs that vary with the level of production or output.  VC directly relates to the quantity of output.  When more goods and services are produced, the VC goes up and vice-versa.
7. TOTAL COSTS (TC) – refers to the total expense incurred in reaching a particular level of output.  The TC of production for a given quantity can be determined by adding the fixed costs and variable costs to obtain the average or unit cost.
8. UNIT COST (UC) – can be obtained by adding the fixed and variable costs.

Is the term “costs” still complex to you?  I hope not… and, for you, these information entail no sort of costs.

Just my little thoughts…

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