The classification of cost into money and real cost has been given by Marshall.
Money Cost:
When production cost is expressed in terms of monetary units, it is called money cost. It means the aggregate money expenditure incurred by a producer on the purchase, procurement and processing of inputs.
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Money cost is widely used in the theory of production. While the production function considers technical relationship between physical inputs and output, the cost analysis basically deals with the monetary aspect of these relationships. This cost includes not only sacrificed alternative, but also monetary payments. It is the sum of explicit and implicit cost.
Real Cost:
Alfred Marshall calls real cost of production as a ‘social cost’. Real cost refers to the payments made to the factors of production to compensate for disutility’s of rendering their services. It is computed in terms of the toil, trouble, pain and discomfort involved for labour, when it is engaged in production.
Similarly, the abstinence, pain and sacrifice involved in saving and capital accumulation is the real cost of capital. In the words of Marshall,
“the exertions of all the different kinds of labour that are directly or indirectly involved in making it together with abstinence or rather the waiting required, for saving the capital used in making it, all these sacrifices together will be called the real cost of production of a commodity”.
All works do not involve same level of real cost. Some works are more unpleasant, irksome and painstaking and therefore, involve more real sacrifice. Similarly, a work in which the health of the workers is adversely affected involves more real cost.
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The concept of real cost, though important from social point of view, lacks precision due to subjectiveness involved. It cannot be subjected to accurate monetary measurement. In reality, real costs seldom equal money expenses of production. The real costs can also be measured at constant prices, i.e., by adjusting money cost for rise in the prices.