Cost Concepts and Items of Cost

Cost Concepts and Items of Cost

Cost is the value of the factors of production used in producing and distributing goods and services. The cost of a factor unit equals the maximum amount which the factor could earn in alternative employment. Concept means idea underlying or general motion.

The cost of production of a crop is considered at three different levels viz. Cost A, Cost-B and Cost-C. The concept of three costs such as Cost-A, Cost B and Cost-C is followed by the Directorate of Economics and Statistics, Government of India in their cost studios. These cost concepts are generally followed in the studies of cost of production of crops.

The input items included under each category of cost are given below.

Cost-A: Actual paid-out costs for owner cultivator, inclusive of both cash and kind expenditure which include following cost items,

  1. Hired human labour : a) Male b) Female

  2. Total bullock labour a) Owned b) Hired

  3. Seeds

  4. Manures

  5. Fertilizers

  6. Insecticides and pesticides

  7. Irrigation charges

  8. Land revenue, cusses and other taxes

  9. Depreciation or capital assets

  10. Transport and Marketing

  11. Interest on working capita1

Cost B: If the amount invested in purchase of land would have been put in some other long term enterprise or in a bank, it would have yielded some returns or interest. But due to the investment of the amount in purchase of land, the farmer has to scarify returns or interest that he would have otherwise gained. And as such this loss is considered as cost, it is called rental value of land. Similarly, the hypothetical interest that the capital invested in farm business would have earned, if invested alternatively is also considered as cost. Rental value of land and interest on fixed capital represent imputed costs which are added to Cost a to give Cost B
Cost B = Cast A + imputed rental value of owned land + Imputed interest on owned fixed capital.

Cost C:
It is the total cost of production which includes all cost items, actual as well as imputed. The value of holding’s own labour is to be imputed and added to cost B to workout Cost C.

Cost C = Cost B + imputed value of family human labour.

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