Question

Define and compare the following types of costs, providing an example of each at your workplace: Please write 700 words

• Sunk costs
• Incremental costs
• Fixed costs
• Variable costs
• Marginal costs
• Opportunity costs
• Out of pocket costs

Answer 1

Sunk cost is the cost which is incurred in the past; retrospect and cannot be recovered. It is a cost incurred at once even before production started.

Incremental cost is marginal cost incurred for each additional unit of production. It is incurred till the time output is being produced.

Fixed costs are costs which are independent of the level of output being produced but it is incurred along with variable cost. It is not sunk cost because it can be recovered by the firm.

Variable cost is the cost which vary with level of output produced by the firm. It is zero when no production takes place. The typical examples are labor, working capital etc.

Opportunity cost is the next best alternative forgone. it is the value of the output which is not produced in order to produce someother good.  

Out of pocket costs are those costs which require payments in the current period. It requires management decision making to incur such costa or not. For example, gasoline for a car or health expenses are some