Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does MC stand for in the context of cost functions?

1. Market Cost

2. Minimum Cost

3. Marginal Cost

4. Mean Cost

The correct answer is: Marginal Cost

In the context of cost functions, MC stands for Marginal Cost. Marginal cost is a fundamental concept in economics and accounting that refers to the additional cost incurred when producing one more unit of a good or service. It reflects the change in total cost when output is increased by a single unit and is crucial for decision-making in both pricing and production levels. Understanding marginal cost helps businesses evaluate how much profit can be gained from producing additional units. If the selling price of the product exceeds the marginal cost of production, it usually indicates that producing more units is beneficial and will contribute to overall profit. Conversely, if the marginal cost exceeds the selling price, it would not be wise to increase production as it would lead to losses. This concept is also closely linked to production efficiency and can guide firms in minimizing costs by helping them identify optimal production levels where costs are balanced with revenue. Hence, recognizing MC as Marginal Cost is key to effective cost management and strategic planning in business operations.