Fixed, variable and Incremental Cost

2. FIXED , VARIABLE
AND INCREMENTAL
COST

3. Rahat Inayat Ali: 14CH23
Assigned by : Aisha Kousar

4. Topics:
Fixed cost.
Variable cost.
Incremental cost.

5. WHAT IS COST ??
• An amount that has to be paid .
• spent to buy or obtain something.
• In business and accounting, cost is the monetary value
spent by a company to produce a product. It does not
include profit mark-up.

6. FIXED COST
• Fixed costs are costs that are independent of output.
• Fixed costs are those costs that do not change based on
production levels.
• These remain constant throughout the relevant range and are
usually considered sunk for the relevant range (not relevant to
output decisions). Fixed costs often include rent, buildings,
machinery, taxes etc.

7. • A fixed cost is a basic operating expense of a business that cannot
be avoided .
for example:
o insurance,
o interest,
o rent,
o salaries, and wages.

8. VARIABLE COST
• Variable costs are costs that vary with output.
• Generally : variable costs increase at a constant rate
relative to labor and capital. Variable costs may includes
utilities, materials used in production, etc.

9. • Variable costs change according to the quantity of a good
or service being produced. The amount of materials and
labor that is needed for to make a good increases in
direct proportion to the number of goods produced. The
cost "varies" according to production.

10. • Variable costs includes inputs like labor and raw materials.
Variable costs are also the sum of marginal costs over all of the
units produced (referred to as normal costs).
• For example,
 in the case of a clothing manufacturer, the variable costs would be
the cost of the direct material (cloth) and the direct labor. The
amount of materials and labor that is needed for each shirt
increases in direct proportion to the number of shirts produced.
The cost "varies" according to production.

11. TOTAL COST = FIXED COST + VARIABLE COST

12. INCREMENTAL COSTS
• Incremental cost is the cost associated with
increasing production by one unit.
• some costs are fixed and other variable, the
incremental cost will not be the same as the
overall average cost per unit.

13. • Incremental costs are closely related to the
concept of marginal cost.
• While marginal cost refers to the change in
total cost resulting from producing an
additional unit of output.
• incremental cost refers to total additional cost
associated with the decision to expand
output or to add a new variety of product etc.

14. Thank You