Definition: Total cost is an economic measure that sums all expenses paid to produce a product, purchase an investment, or acquire a piece of equipment including not only the initial cash outlay but also the opportunity cost of their choices.
What Does Total Cost Mean?
What is the definition of total cost? The meaning of this term varies slightly depending on the content. For example, when using it to define production costs, it measures the total fixed, variable, and overhead expenses associated with producing a good. This is a fundamental concept for business owners and executives because it allows them to track the combined costs of their operations. It allows the individuals to make pricing and revenue decisions based on whether total costs are increasing or decreasing. Furthermore, interested individuals can dig into the total cost numbers to separate them into fixed costs and variable costs, and adjust operations accordingly to lower overall costs of production. Management also uses this idea when contemplating capital expenditures.
Investors, however, use this concept differently by looking at the funds needed to purchase an investment along with the opportunity costs associated with picking one investment over another.
Let’s look at an example.
Example
Jane is the Chief Operating Officer of the largest car manufacturer in the world. The company has recently been seeing its total costs increase 15% year over year and Jane has been put in charge of analyzing this trend in an effort to fix it.
She sees that the company’s costs, overall, have risen from $100,000 to $132,250 in only two years, which validates the extreme growth in costs. After looking through the numbers, she sees, to her surprise, that fixed costs have not actually increased, but have decreased from $70,000 to $65,000. Additionally, she sees that the firm’s variable costs, specifically in salary and benefits, have ballooned from $30,000 to $67,250.
She reasons that the opportunity cost of this $37,250 is too great, and could be spent elsewhere. She cuts staff and increases shifts, and spends that $37,250 on other investments for the company, eventually lowering overall total costs.
Summary Definition
Define Total Costs: Total costs means an economic measurement of the entire amount paid to produce a product.
