Types of costs of a firm

Implicit (transfer) costs. There  are costs  which  are not considered  when  calculating   profits  of the firm by the accountants   e.g. costs  in form of noise,  pollution,  family  labour,  self-owned   inputs, etc. They are normally assumed to be zero when computing profits.

Explicit (nominal/money) costs. These  are costs  which  are considered when  calculating   profits of the firm by the accountants   e.g. costs  of raw materials,  hired  labour,  transport  costs   etc.

Note. Explicit cost can either be fixed costs or variable costs.

Fixed   (Supplementary/Overhead) costs.  These    are   the   costs    incurred    by   the   producer irrespective   of the level of output.   OR These are costs which remain constant irrespective   of the level of output. For example the cost of land, building, vehicles, salaries for top management, rent.

Variable   (Prime)   Costs.  These   are  costs  which  change  with  the  changes   in the  level  of  output, that  is; when  the level  of output  increases,  variable  costs  also  increase   for example   the  cost  of raw materials,  wage payments,   transport  costs,  electricity  etc.

Total costs (TC) = Explicit costs + Implicit costs

Total costs (TC)  = Total  Fixed  costs  (TFC)  + Total  Variable  costs  (TVC)  + Implicit  costs

Assuming that implicit costs = 0

TC =TFC + TVC.

Assuming   zero implicit cost, TC = TFC + TVC.

When  output  is zero  as shown  from  the  graph,  there are no  variable  costs  (TVC = 0).  This implies that the producer   has not yet started producing    and therefore    he   cannot   incur   any   variable    cost.   Therefore    Total    Cost   = 0 + Total    Fixed    cost (TC = TFC).

When output increases,   TVC and TC increase   by the same amount.  This is because TFC are constant at all levels of output and an increase in TC results from the increase in TVC.