Total cost refers to the overall cost of production, which includes both fixed and variable components of the cost. In economics, the total cost is described as the cost that is required to produce a product.
Total cost is composed of two components, which are:
Fixed cost: It is the cost that is constant. In other words, these are the costs that remain the same, irrespective of the number of units that are being produced. For example, the lease for a building or the rent for an apartment.
Variable cost: Variable cost is the cost that changes (increases or decreases) based on the number of goods produced by a company or the service requirements of customers.
Total cost is an important indicator of the financial performance of a company. This can show if a company is spending too much money on certain processes and if there is a need to cut down the costs.
Mathematically, the total cost formula can be represented as,
Total Cost = Total Fixed Cost + Total Variable Cost
It can also be represented in a more advanced way as,
Total Cost = (Average fixed cost + Average variable cost) x Number of units
This was all about the total cost formula, which is a very important concept for determining the total cost of production. For more such interesting concepts, stay tuned to BYJU’S.
