The total cost is made up of fixed costs plus variable costs.
Before entering fully into the meaning of the term total cost , it is necessary to proceed to discover the etymological origin of the two words that give it shape:
-Cost, first of all, we have to explain that it derives from the Latin verb “constare” which can be translated as “to square” or “to reach an agreement.”
-Total, on the other hand, also comes from Latin. In its case, it is a word that emanates from the sum of two clearly differentiated components: the noun “totus”, which means “everything”, and the suffix “-al”, which is used to indicate “relative to”.
The economic outlay that is made with the objective of maintaining or acquiring a product or service is called cost . The idea of total , on the other hand, refers to that which encompasses everything of its kind or that is general.
What is total cost
The concept of total cost , in this framework, refers to all of a company's costs . This is the sum of variable costs (which change when the production volume changes) and fixed costs (which remain stable beyond the production level).
Take the case of a hamburger restaurant . This establishment has fixed costs such as the rent of its building and employee salaries , and variable costs such as raw materials : bread, hamburgers, dressing, etc. The sum of all these costs (rent, salaries, raw materials) constitutes the total cost of the restaurant to stay in operation.
Workers' salaries, rent for premises and the purchase of raw materials are part of the total cost of a company.
Earning benefits
All commercial endeavors have the purpose of generating economic benefits ( profit ). Obtaining profits is linked to total costs since, if production costs are very high, the income obtained from sales is hardly sufficient to achieve profits.
If a company has total costs of $50,000 per month and receives income of $45,000 in the same period, it will make a loss. On the other hand, if you manage to reduce your total costs to $20,000 and continue generating income of $45,000, you will achieve a profit of $25,000 per month. Another possibility to maximize profits is to raise sales prices , without having to modify costs.
Components of total cost
Therefore, we can state that the components of the total cost are production costs ( raw materials , personnel, machinery, facilities, tools, salaries, etc.), administrative costs, distribution costs, and financial costs, among others. . Among these others are those related to the commercial field, manufacturing, engineering, middle management...
It is important to be clear that, at all times, we must differentiate what is the total cost from the so-called marginal cost. The latter is the change that occurs with respect to the total cost if production changes. That is, it establishes how the total cost of a company varies if it changes its production level. Thus, a single extra unit that is made will already represent a change in the aforementioned total cost.