10.5 Theory of cost

Cost of production is defined as the total amount of money incurred in the production process. In other words, it is the total amount of money injected into production with a view to obtaining out put. Cost of production has been broken down into the following category.

Fixed cost

This the cost incurred on equipments and facilities that do not change form in the production process. They include the cost of maintenances, obtainable through the application of the following formula.

FC = TC - VC Graphically, the FC is presented thus

10.5 Theory of cost

Variable cost

As the name implies, variable cost are those cost incurred on items/facilities change form in the process of production. Example of these costs includes the cost of raw-materials, electricity bills or diesel, maintenance, salary and allowances, etc mathematically, it is represented as follows:

VC=TC-FC

10.5 Theory of cost

Total Cost (TC)

This is the total amount of money incurred in the production process. In other words, it is the summation of fixed and variable cost.
TC=FC+VC and TC=ACXQ
Graphically, TC is presented thus

10.5 Theory of cost

Average Cost (AC)

Average cost is obtainable by dividing the total cost by the unit of out put produced. Graphically, it is depicted as follows

10.5 Theory of cost

Marginal Cost (MC)

Marginal cost is the change in total cost (TC) as a result of charge in the unit of output.


It is depicted graphically as follows: