A Business Encyclopedia

Total Cost

Definition: The Total Cost is the actual cost incurred in the production of a given level of output. In other words, the total expenses (cost) incurred, both explicit and implicit, on the resources to obtain a certain level of output is called the total cost.

The total cost includes both the variable cost (that varies with the change in the total output) and the fixed cost (that remains fixed irrespective of the change in the total output). Thus, total cost includes the cost of all the input factors used for producing a certain level of output.

Often, the economists use two-factor inputs in the cost model Viz. Capital (K) and labor (L). The capital is considered to be a fixed cost, i.e. will remain fixed irrespective of the production level and per unit rental price is denoted by ‘r’. Thus the total fixed cost is ‘Kr’. While, the labor, denoted ‘L’ is considered as the variable cost, which changes in the proportion to the level of production. The wage rate is denoted by ‘w’ and thus, the total variable cost is ‘Lw’. Symbolically,

TC = FC + VC = Kr +Lw

If it is assumed that the unit variable (labor) cost remains constant, then the total cost is linear in volume and can be calculated as:

TC = Fixed Cost + Unit Variable Cost X Amount

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