In last article, I have discussed the concept of cost of capital. In this article, we will discuss the classification of cost:
1.) Historical or book or past cost and future cost: historical cost is related to past. It helps in estimation of future cost. While future cost is estimated for future as in financial decisions future cost is more important than the historical cost.
2.) Specific cost and composite cost or weighted average cost of capital: specific cost is the cost of a specific source of capital while composite cost is the combined cost of various source of capital.
3.) Explicit cost or internal rate of return and implicit cost or opportunity cost: explicit cost equates the present value of cash outflow with the present value of cash inflow. On the other hand implicit cost is the opportunity forgone to take the advantage of particular project.
4.) Average cost and marginal cost: average cost means the average cost of different source of capital as preference shares, equity shares and debentures. While marginal cost is the cost which is spend to get extra funds required by the firm.