What is Total Cost ? | Formula, Example and Graph

What is Total Cost?

In the short run, some of the factors are fixed, while other factors are variable. In the same way, the short-run costs are also categorised into two different kinds of cost; viz., Fixed Costs and Variable Costs. The sum total of these costs is equal to the Total Cost.

1. Total Fixed Cost (TFC) or Fixed Cost (FC):

The costs on which the output level does not have a direct impact are known as Fixed Costs. For example, salary of staff, rent on office premises, interest on loans, etc. Other names of fixed costs are Supplementary Cost, Overhead Cost, Unavoidable Cost, Indirect Cost, or General Cost. Fixed cost is the cost spent on fixed factors such as land, building, machinery, etc. The amount spent on these factors cannot be changed in the short run. Also, the payment made on these factors remains the same whether the output is small, large, or zero.

Example:

In the above graph, X-axis represents the Units of Output and Y-axis represents the Fixed Cost. TFC is the fixed cost curve formed by plotting the points in the above schedule. The TFC curve makes an intercept with Y-axis equal to ₹10 Fixed Cost. It is a horizontal straight line parallel to the X-axis. It is because, at all output levels (even at zero level), TFC remains the same.

2. Total Variable Cost (TVC) or Variable Cost (VC):

The costs on which the output level has a direct impact are known as Variable Costs. For example, fuel, power, payment for raw materials, etc. Other names of variable costs are Prime Cost, Avoidable Cost, or Direct Cost. In other words, variable cost is the cost spent on variable factors such as power, direct labour, raw material, etc. The amount spent on these factors changes with the change in output level. Also, these costs arise till there is production and become zero at zero output level.

Example:

In the above graph, X-axis represents the Units of Output and Y-axis represents the Variable Cost. TVC is the total variable cost curve formed by plotting the points in the above schedule. It can be seen in the above graph, the TVC curve starts from the origin, which means that at zero level of output, the variable cost is also zero. TVC is an inversely S-shaped curve because of the Law of Variable Proportion. It means that the TVC curve firstly increases at a decreasing rate (due to better utilisation of fixed factors and an increase in the efficiency of variable factors) and then increases at an increasing rate (due to a fall in the efficiency of the variable factors as there is a limitation of fixed factor).

3. Total Cost (TC):

The total expenditure incurred by an organisation on the factors of production which are required for the production of a commodity is known as Total Cost. In simple terms, total cost is the sum of total fixed cost and total variable cost at different output levels.

TC = TFC + TVC

As the Total Fixed Cost remains the same at all output levels, the change in Total Cost completely depends upon Total Variable Cost.

Example:

In the above schedule, TC and TFC are equal at zero output level; i.e., ₹10 because TVC at this level is zero. TFC at 1 unit of output also remains the same; i.e., ₹10, but TVC increases to₹5, which makes TC = 10 + 5 = ₹15. In the same way, TC at 2, 3, 4, and 5 output levels will be calculated.

In the above graph, the TC curve is obtained by adding TVC and TFC curves. As TFC remains the same at all output levels, the change in TC is solely due to TVC. Therefore, the distance between the TC curve and the TVC curve always remains the same. Just like the TVC curve, the TC curve is also inversely S-shaped because of the Law of Variable Proportion.