Total cost

(noun)

Total cost (TC) describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as buildings and machinery.

Related Terms

Examples of Total cost in the following topics:

  • Profit-Maximization Pricing

    • Any costs incurred by a firm may be classed into two groups: fixed costs and variable costs.
    • Fixed cost and variable cost, combined, equal total cost.
    • The profit-maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
    • The above method takes the perspective of total revenue and total cost.
    • A firm may also take the perspective of marginal revenue and marginal cost, which is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.

  • Profit

    • This will often require them to revise sales targets as prices and costs change.
    • To obtain the profit maximizing output quantity, you start by recognizing that profit is equal to total revenue (TR) minus total cost (TC).
    • The profit maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
    • This output level is also the one at which the total profit curve is at its maximum.
    • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.

  • Markup Pricing

    • So the relevant cost would be the cost that a buying company would incur if it made the product itself.
    • The total cost has two components: total variable cost and total fixed cost.
    • This return can be considered RsX, where Rs is the ratio of the respective share of total profit.
    • A cost-plus price will equal average variable costs plus average fixed costs plus markup per unit.
    • The total average cost for a product is determined by dividing the total fixed costs (TFC) and total variable costs (TVC) by the quantity of the product produced, and then summing these together.

  • Break-Even Analysis

    • Try to reduce the fixed costs (by renegotiating rent for example, or keeping better control of telephone bills or other costs)
    • In the linear Cost-Volume-Profit Analysis model, the break-even point - in terms of Unit Sales (X) - can be directly computed in terms of Total Revenue (TR) and Total Costs (TC) as: where TFC is Total Fixed Costs, P is Unit Sale Price, and V is Unit Variable Cost.
    • Thus the break-even point can be more simply computed as the point where Total Contribution = Total Fixed Cost:
    • It assumes that fixed costs (FC) are constant.
    • We can derive the calculation for the break-even quantity from the relation of total revenue to total costs.

  • Fixed Costs

    • They and are often referred to as overhead costs.
    • Discretionary fixed costs usually arise from annual decisions by management to spend on certain fixed cost items.
    • Average fixed cost is a per-unit-of-output measure of fixed costs.
    • As the total number of goods produced increases, the average fixed cost decreases because the same amount of fixed costs is being spread over a larger number of units of output.
    • This graph breaks down the difference between fixed costs and variable costs.

  • Transfer Pricing

    • However, if they set this price too high then the Indiana division will not make their required profit, and the total company will have less of a profit.
    • From marginal price determination theory, the optimum level of output is that where marginal cost equals marginal revenue.
    • But marginal cost of production can be separated from the firm's total marginal costs.
    • Likewise, the marginal revenue associated with the production division can be separated from the marginal revenue for the total firm.
    • From marginal price determination theory, the optimum level of output is where marginal cost equals marginal revenue.

  • Cost-Based Pricing

    • Cost-based pricing is the act of pricing based on what it costs a company to make a product.
    • Cost-based pricing is the act of pricing based on what it costs a company to make a product.
    • Price = (1+ Percent Markup)(Unit Variable Cost + Average FixedCost) .
    • The bicycle divi­sion, which management thought of as Diamond's core business, gen­erated just 10% of total revenues and barely covered its own direct labor and insurance costs.
    • Cost-based pricing is misplaced in industries where there are high fixed costs and near-zero marginal costs.

  • Value-Based Pricing

    • Value-based pricing seeks to set prices primarily on the value perceived by customers rather than on the cost of the product or historical prices.
    • This strategy focuses entirely on the customer as a determinant of the total price/value package.
    • Another factor is the cost of switching.
    • Examples include matching the price of competitors, a traditional price charged for a particular product, and charging a price that covers expected costs.
    • Value-based pricing focuses entirely on the customer as a determinant of the total price/value package.

  • Marginal Analysis

    • Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.
    • Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.
    • In business, the practice of setting the price of a product to equal the extra cost of producing an extra unit of output is known as marginal-cost pricing.
    • Businesses often set prices close to marginal cost during periods of poor sales.
    • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero.

  • Competition Based on Value

    • The customer's perceived value of a product is the relationship between the perceived benefits in relation to the perceived costs of receiving those benefits.
    • Value is thus subjective (i.e., a function of consumers' estimation) and relational (i.e., both benefits and cost must be positive values).
    • For a firm to deliver value to its customers, it must consider what is known as the "total market offering. " This comprises the organization's reputation, staff representation, product benefits, and technological characteristics as compared to competitors' market offerings and prices.
    • The migration from product-oriented to customer-oriented strategies is called Total Customer Value Management (TCVM).
    • This image shows how value creation is tied to cost and revenue.