Outlay costs Concept of Costs

In term of the Nature of Expenses

The actual expenses incurred by the entrepreneur in employing inputs are called outlay costs. These include costs on payment of wages, rent, electricity or fuel charges, raw materials, etc. We have to treat them are general expenses for the business. 

Opportunity costs 

Opportunity costs are incomes from the next best alternative that is foregone when the entrepreneur makes certain choices. 

For example, the entrepreneur could have earned a salary had he worked for others instead of spending time on his own business. These costs calculate the missed opportunity and calculate income that we can earn by following some other policy. 

Concept of Costs in terms of Traceability 

1. Direct costs 

Direct costs are related to a specific process or product. They are also called traceable costs as we can directly trace them to a particular activity, product or process. 

They can vary with changes in the activity or product. Examples of direct costs include manufacturing costs relating to production, customer acquisition costs pertaining to sales, etc. 

2. Indirect costs 

Indirect costs, or untraceable costs, are those which do not directly relate to a specific activity or component of the business. For example, an increase in charges of electricity or taxes payable on income. Although we cannot trace indirect costs, they are important because they affect overall profitability. 

Concept of Costs in terms of the Purpose 

1. Incremental costs 

These costs are incurred when the business makes a policy decision. For example, change of product line, acquisition of new customers, upgrade of machinery to increase output are incremental costs. 

2. Sunk costs 

Suck costs are costs which the entrepreneur has already incurred and he cannot recover them again now. These include money spent on advertising, conducting research, and acquiring machinery. 

Concept of Costs in terms of Payers 

1. Private costs 

These costs are incurred by the business in furtherance of its own objectives. Entrepreneurs spend them for their own private and business interests. For example, costs of manufacturing, production, sale, advertising, etc. 

2. Social costs 

As the name suggests, it is the society that bears social costs for private interests and expenses of the business. These include social resources for which the firm does not incur expenses, like atmosphere, water resources and environmental pollution. 

Concept of Costs in terms of Variability 

1. Fixed costs 

Fixed costs are those which do not change with the volume of output. The business incurs them regardless of their level of production. Examples of these include payment of rent, taxes, interest on a loan, etc. 

2. Variable costs 

These costs will vary depending upon the output that the business generates. Less production will cost fewer expenses, and vice versa, the business will pay more when its production is greater. Expenses on the purchase of raw material and payment of wages are examples of variable costs.