DISTINCTION BETWEEN ECONOMIST’S AND ACCOUNTANT’S VIEWS ON COST

COST OF PRODUCTION SCHEDULE

All the different concepts discussed in Unit 23.3 of this chapter are interrelated in a number of ways. They can easily be computed or calculated mathematically with the aid of their various formulae.

The cost concepts are better interpreted and understood when they are arranged in a schedule called the cost of production schedule as in Table below

Any missing figure(s) can be calculated or filled up using other cost values and their respective formulae.

Unit of Output (IQ) NTotal Fixed Cost (TFC) NTotal Variable Cost (TVC) NTotal Cost Cost (TC) NAverage Total Cost (ATC) NAverage Variable Cost (AVC) NAverage Fixed Cost (AFC) NMarginal Cost (MC) N
1 2 3 4 5 6 720 20 20 20 20 20 2012 13 16 18 20 22 2432 34 36 38 40 42 4432 17 12 9.5 8 7 6.312 7 5.3 4.5 4 3.6 3.420 10 6.6 5 4 3.3 2.8– 2 2 2 4 2 2

   MATHEMATICAL APPROACH TO COSTS

As stated earlier, some of the figures in Table 23.1 may be missing and you are required to fill them up.

You can only do this by applying the various cost concept formulae to solve them.

Example 1

Complete the following cost schedules and answer the questions that follow.

Output QTotal Cost (TC)Average Cost (AC)Marginal Cost (MC)
1 2 3 4 5 618 14 ? 20 ? 488 ? 6 ? 6 ?– ? ? ? ? ?
  • At what output is AC at the minimum?
  • At what output is MC at the minimum?
  • At what output does AC start increasing?
  • At what output does MC start to be greater than AC?
  • What is the maximum output? (SSCE)

Solution

Output QTotal Cost (TC)Average Cost (AC)Marginal Cost (MC)
1 2 3 4 5 618 14 a 20 b 488 c 6 d 6 e– f g h i j

TC = AC x ouput

a = output 3

TC = AC x output = 6 x 3

TC = 18

b = TC = 6 x 5

TC = 30

                        TC                   =          14

c = AC =         output                          12        =  7

d = AC                        20        = 5

                        4

f           =          MC at output 2

                        TC 2 – TC = 14 – 18 = 6

g          =          MC at output 3 = 18 – 14 = 4

h          =          MC at output 4 = 20 – 18 = 2

i           =          MC at output 5 = 30 – 20 = 10

j           =          MC at output 6 = 48 – 30 = 18

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