Costs are a concept of economic theory

In all the means involved in production (that is, in items and in its means), as well as in the labor force, advanced industrial capital is invested, the form of movement of which is the costs of production. This is the cost of the economic resources that the entrepreneur is wasting to produce his products.

This concept in economic theory is based on the idea that resources are limited, and we need to look for alternative ways of using them. The fact is that the choice of the specific method by which the goods will be produced causes the loss of those benefits that can be obtained using the appropriate resources of the methods that fit best of all.

In this connection, costs are divided into two groups: they are external (explicit) and internal (hidden).

External (direct costs) are those that go to pay for economic resources - the purchase of raw materials, equipment, transportation services, labor services. Their suppliers are not owners of the firm.

Internal (indirect) costs are those that are used to use their own, unpaid resources. They include those incomes that the entrepreneur lost in the most profitable alternative use of his own resources. Internal costs - this is also the minimum payment that is necessary for an entrepreneur to continue working in a particular area of business.

The delineation of direct and indirect costs reflects two approaches to understanding the nature of the company's costs.

1. Accounting approach. It provides for the transfer of direct costs. They are paid immediately after the invoice or invoice is received. Accounting costs are displayed in the balance sheet of the firm.

2. The economic approach. He credits the costs of production with both direct and indirect costs associated with the ability to use resources of choice. From accounting, economic costs are distinguished by the size of the value of personal resources.

The cost of lost opportunities (alternative) is the value that, when compared with the degree of risk, has the highest payment for the chosen production opportunity or the company's behavior.

This means that economic costs are those that an entrepreneur must commit to attract resources aimed at alternative use. They reflect the prices of resources at the best possible option for their use.

Depending on the time period during which it is possible to change the economic resources that the firm attaches in order to produce a certain type of product, they distinguish:

- the firm's costs in the long-term (that is, in a time period, which is enough to change all the resources that will be attracted);

- costs of the firm in the short-term (that is, in a time interval, during which at least one type of resources does not change).

The costs of the latter kind are further divided into constant, general, average, variable and boundary.

Constant (or conditionally-permanent) costs occur regardless of the change in production volumes. This is the cost of rent, for the maintenance of administrative personnel.

Variable costs are directly related to changes in production volumes. This is the cost of electricity, raw materials, labor remuneration for workers.

Aggregate or total costs are the firm's costs of acquiring and using all the factors of production. They consist of a sum of fixed costs and variables.

Average costs are presented in the form of the average value of the cost of producing a unit of output.

Boundaries are the incremental costs that are necessary to produce an additional unit of output.

In some cases, it may happen that firms incur irreversible costs. They can not be replenished and show:

- about the lost opportunities that are associated with erroneous management decisions;

- about the costs that are expended once and for all and are not replenished even if the firm ceases to exist (for example, advertising costs).