Even in market systems, not everything has an identifiable cost, nor does every cost count in a decision. The Castner-Kellner process electrolyses concentrated brine to produce sodium hydroxide (its original purpose) and chlorine (its modern application). It is quite impossible to decide how much each chemical costs, because they are created simultaneously.
In the 1970s, the government of a North African State decided (on advice from a firm of international strategy consultants) to raise sharply the price of phosphates, of which their country held much of the world’s accessible reserves. The effect of this was overnight to make it economic to mine deposits in Tonga. The Tongans duly started exploiting their reserves, with the effect that where there had previously been a shortage of phosphates, there was now a surplus. The price duly fell (to below its previous level) but this did not put the Tongans off. Having once made the investment, they were wise enough to realise that this was what economists call a sunk cost; not because it was connected with mining, of course, but because closing the mines would not get the investment back. On an operating basis, the Tongan mines were profitable, and they continued to run. It is not recorded whether the consultants received their full fee for the advice.
Economic theory is elegant in its treatment of costs, after the simple assumption that they can actually be measured. Governments insist that they be measured; the Inland Revenue’s interest in cost is that it will allow businesses to offset the costs of what was sold against revenues for the purpose of calculating liability to taxation, but what was sold and what was made can be quite different. To distinguish, a costing system is needed.
In the final analysis, someone – frequently an accountant – is charged with the task of counting everything that goes on. This appears to be a sophisticated process, but ultimately it boils down to stating: ‘Last year we made 37,965,243 prummets, and we spent $9,827,436 doing it, so the cost of a single prummet is $9,827,436 h- 37,965,243 = 25.885 pence’.