solution:

Meaning of cost:

• Cost may be defined as the monetary value of all sacrifices made to achieve an objective, i.e., producing goods and services.

• Costs are very important in business decision-making. Cost of production provides the floor to pricing.

• It helps the manager to take the correct decision, such as what price to quote, whether to place particular order for inputs or not whether to abandon or add a product to the existing product line, and so on.

• Ordinarily, cost refers to the money expenses incurred by a firm in the production process.

• Cost also included the imputed value of the entrepreneur’s resources and services and the salary of the owner-manager.

Factors of cost:

• Factors determining the cost are:

- (a) Size of plant:

• There is an inverse relationship between the size of the plant and cost. Assize of plant increases, cost falls, and vice versa.

- (b) Level of Output:

• There is a direct relationship between output level and cost. More the level of output, more is the cost ( i. e., total cost) and vice Versa.

- (c) Price of Inputs:

• There is a direct relationship between the price of inputs and cost. As the price of inputs rise, cost rises and vice versa.

- (d) State of technology:

• More modern and upgraded technology implies lesser cost and vice versa.

- (e) Management and administrative efficiency:

• Efficiency and cost are inversely related. More efficiency in management and administration better will be the product and less will be the cost.

• The cost will increase in case of inefficiencies in management and administration.