What Is Total Cost Basis?
On the basis of clarifying various cost behaviors, the total cost of the enterprise is finally divided into two categories: fixed cost and variable cost, and a corresponding cost function model is established. Because there is a certain dependency between cost and business volume, total cost can be expressed as a function of business volume, that is, it is assumed that total cost can be described approximately by a one-element linear equation. Within the relevant range, the total cost function can be expressed as follows:
Total cost
Right!
- On the basis of clarifying various cost behaviors, the total cost of the enterprise is finally divided into two categories: fixed cost and variable cost, and a corresponding cost function model is established. Because there is a certain dependency between cost and business volume, total cost can be expressed as a function of business volume, that is, it is assumed that total cost can be described approximately by a one-element linear equation. Within the relevant range, the total cost function can be expressed as follows:
- y = a + bx
- Where y is the total cost, x is the business volume, a is the total fixed cost (that is, the sum of the fixed cost in the true sense and the fixed part of the mixed cost), and b is the unit variable cost (that is, the unit variable cost and Sum of unit variable costs in mixed costs), bx represents total variable costs.
- The total variable cost varies with the business volume, while the unit variable cost remains the same; the total fixed cost is fixed, and the fixed cost burdened by the unit business volume decreases as the business volume increases.
- Total cost function
- The total cost function refers to the relationship between a firm's total cost and its output.