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:
-Cost, first of all, we have to state that it derives from the Latin verb “constare” which 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 “all”, and the suffix “-al”, which is used to indicate “relative to”.
Is named cost to the financial 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 alludes to that which 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 are modified when the production volume changes) and the 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 your building and wages 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 stay in operation.
All commercial ventures have the purpose of generating economic benefits (Profits). Making a profit is linked to total costs since, if production costs are very high, the income from sales is hardly sufficient to make a profit.
Yes one company has total costs of $ 50,000 per month and receives income of $ 45,000 in the same period, will give losses. Instead, if you manage to reduce your total costs to $ 20,000 and continue to generate revenue of $ 45,000, you will make a profit of $ 25,000 per month. Another possibility to maximize profits is to raise the sale prices, without the need to modify costs.
Therefore, we can state that the components of the total cost are production costs (raw material, personnel, machinery, facilities, tools, salaries, etc.), administrative, distribution and financial costs, 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, it is necessary to 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 level of production. Thus, a single more unit that is made will already imply a change in what is the aforementioned total cost.