Let us make an in-depth study of Cost Concept:-
1. Definition of Cost Concept 2. Scope of Cost Concept 3. Size.
Definition of Cost Concept:
The term ‘cost’ is most widely used as the ‘money cost’ of production which relates to the money expenditure of a firm on:
(i) Wages and salaries paid to the labour.
(ii) Payment incurred on machinery and equipment.
(iii) Payment for materials, power, light, fuel, transportation etc.
(iv) Payments for rent and insurance.
(v) Payments to Government by way of taxes.
Money costs therefore relate to money outlays by a firm or factors of a production which enable the firm to produce and sell a product. It should be remembered that every producer is interested in money costs. Besides money cost there are other costs that are equally important to take decisions on various matters.
Scope of Cost Concept:
It is advisable to plan before-hand the scope of activities of the firm On the basis of further experience the plan may be revised from time to time in deciding about the scope.
The following points should be taken into consideration in this regard:
(1) What techniques have to be followed in production? What parts have to be manufactured in the factory itself end for what parts should depend on other firm?
(2) Should all the processes involved in the production be carried in the factory or some have to depend upon contracts?
(3) Has the firm to produce the raw-materials itself or should it depend upon other firms?
(4) How far the firm should specialise in production or should it depend upon other firms?
(5) Should all the connected goods with the main product be manufactured by the firm itself and the business scope be expanded?
(6) Should the marketing of the product be organised by the firm itself or should it depend upon other agencies for marketing?
(7) Should the after-sale services to the consumers be undertaken by the firm itself or should firm enter into some agreement with other firm for this important responsibility.
The firm has to take decision on the above question and other allied problems finally setting up the unit, keeping in view that the unit cost in producing and distributing on the product or service should be the lowest and the changes of maximum profits are the brightest.
Size of Cost Concept:
The success and efficiency of the firm also depends on its suitable size. The size of the firm should be optimum as to ensure maximum profitability. The optimum size of the firm is that point which results in the lowest production cost and maximum efficiency.
At this optimum point of output all the technical managerial marketing factors are well balanced. It should be noted that optimum size of the firm is not fixed but goes on altering with the improved techniques of production and managerial experience.