Total cost

Definition

Total cost represents the sum of all costs incurred by a business to produce goods or services. It includes both fixed and variable costs.

5 Must Know Facts For Your Next Test

1. Total cost is calculated as the sum of total fixed costs and total variable costs.
2. Fixed costs do not change with the level of output, while variable costs do.
3. Understanding total cost is essential for pricing decisions and profit analysis.
4. Total cost can be used to determine the break-even point where total revenue equals total cost.
5. Managers analyze total cost to optimize production levels and control expenses.

Review Questions

• What are the components of total cost?
• How does an increase in production volume affect total variable cost and total fixed cost?
• Why is understanding total cost important for managerial decision-making?

Related terms

Fixed Cost: A cost that remains constant regardless of production volume.

Variable Cost: A cost that varies directly with the level of production.

Break-Even Point: The production level at which total revenues equal total costs, resulting in zero profit.