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 shape it:
-Costo, first of all, we have to state that it derives from the Latin verb “constare” that can be translated as “square” or “reach an agreement”.
-Total, on the other hand, also comes from Latin. In his 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”.
Is called cost to the economic disbursement that is made with the objective of maintaining or acquiring a product or a service. The idea of total On the other hand, it refers to what encompasses everything of its kind or that is general.
The concept of Total cost , in this framework, refers to the total costs of a company . It is the sum of the variable costs (which change when production volume changes) and fixed costs (which remain stable beyond the productive level).
Take the case of a restaurant of hamburgers This establishment has fixed costs such as rental of his building and the salaries of employees, and with 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 keep it running.
All business ventures are intended to generate economic benefits (earnings ). Obtaining benefits is linked to total costs because, if the production costs are very high, the revenue from sales is hardly sufficient to make a profit.
Yes one company It has total costs of $ 50,000 per month and receives income of $ 45,000 in the same period, will give losses. On the other hand, if you manage to reduce total costs to $ 20,000 and still generate revenue of $ 45,000, you will make a profit of $ 25,000 per month. Another possibility to maximize profits is to raise sale prices , without changing costs.
Therefore, we can state that the components of the total cost are the production costs (raw material, personnel, machinery, facilities, tools, salaries, etc.), administrative, distribution and financial, among others . Among those 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 of the so-called marginal cost. The latter is the change that occurs with respect to the total cost if production changes. That is, it comes to establish how the total cost of a company varies if it comes to modify what is its level of production. Thus, a single unit of more that is done will already imply a change in what is said total cost.