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Which cost should NOT be included while calculating the fixed cost?

Which cost should NOT be included while calculating the fixed cost? Correct Answer Fuel cost

Cost of Electrical Energy:

The total cost of electrical energy generated can be divided into three parts:

  • Fixed cost
  • Semi-fixed cost
  • Running or operating cost
     

(i) Fixed cost:

  • It is the cost that is independent of maximum demand and units generated.
  • The fixed cost is due to the annual cost of the central organization, interest in the capital cost of land, and the salaries of high officials.
  • The annual expenditure on the central organization and salaries of high officials is fixed since it has to be met whether the plant has high or low maximum demand or it generates less or more units.
  • The capital investment on the land, insurance are fixed and hence the amount of interest is also fixed.
     

(ii) Semi-fixed cost:

  • It is the cost that depends upon maximum demand but is independent of units generated.
  • The semi-fixed cost is directly proportional to the maximum demand on the power station and is on account of annual interest and depreciation on capital investment of building and equipment, taxes, salaries of management, and clerical staff.
  • The maximum demand for the power station determines its size and cost of installation.
  • The greater the maximum demand on a power station, the greater is its size and cost of installation.
  • The taxes and clerical staff depend upon the size of the plant and hence upon maximum demand.
     

(iii) Running cost:

  • It is the cost that depends only upon the number of units generated.
  • The running cost is on account of the annual cost of fuel, lubricating oil, maintenance, repairs, and salaries of operating staff.
  • Since these charges depend upon the energy output, the running cost is directly proportional to the number of units generated by the station.
  • If the power station generates more units, it will have higher running costs and vice-versa.

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