CHAPTER 3

Production Cost Concepts and Application

Cost Concepts
An opportunity cost is the cost of the best

rejected ( i.e., foregone ) opportunity and is hidden or implied Social cost cause by existing negative impact from economy activities. Example : pollution, traffic-jam, inflation.

Cost Concepts

Direct costs can be reasonably measured and allocated to a specific output or work activity -labor and material directly allocated with a product, service or construction activity; Indirect costs are difficult to allocate to a specific output or activity -- costs of common tools, general supplies, and equipment maintenance ;

Cost Concepts
A sunk cost is one that has occurred in the

past and has no relevance to estimates of future costs and revenues related to an alternative course of action. Sunk cost = Book value Market Value

Cost Concepts

An Explicit cost is an easy accounted cost, such as wage, rent and materials. It can be transacted in the form of money payment and is lost directly An implicit cost occurs when one foregoes an alternative action but does not make an actual payment Example- A firm's use of its own capital. Capital could have been rented to another firm instead. So the implicit cost is the pay of rent

Cost Classification & Cost Curve

Fixed costs are those unaffected by changes in activity level over a feasible range of operations for the capacity or capability available. Typical fixed costs include insurance and taxes on facilities, general management and administrative salaries, license fees, and interest costs on borrowed capital. When large changes in usage of resources occur, or when plant expansion or shutdown is involved fixed costs will be affected.

Cost Classification & Cost Curve

Variable costs are those associated with an operation that vary in total with the quantity of output or other measures of activity level. Example of variable costs include : costs of material and labor used in a product or service, because they vary in total with the number of output units -- even though costs per unit remain the same.

Cost Classification & Cost Curve

VC 500 FC

Quantity,Q

Create Linear Cost Equation

a= average variable cost

Contoh 3.1 :
Pengeluaran 1 Kg kopi memerlukan kos berubah =RM5 dan Kos tetap sehari = RM300. a) Terbitkan persamaan linear kos pengeluaran kopi. b) Kirakan kos pengeluaran bagi 1,000 Kg kopi diproses dalam sehari. Penyelesaian: a) Diberi FC = RM300 / hari, VC = RM5 / Kg Jumlah kos, TC = F + aQ = 300 + 5Q b) Bagi 1,000 Kg kopi, TC = (300/hari)(1 hari) + (5 /Kg) x (1000 Kg/hari)(1 hari) = 300 + 5(1000) = RM 5,300 /=

Profit and Breakeven Point

TR = TC

Profit and Breakeven Point

Quantity, Q

Contoh 3.3 :
Daripada Contoh 3.1, Persamaam linear Jumlah kos, TC = 300 + 5Q Katakan kopi dijual RM10 per Kg. a) Hitungkan titik pulang modal. b) Keuntungan jika syarikat mengeluarkan / menjual kopi (i) 100 Kg sehari (ii) 50 Kg sehari

Penyelesaian: a) Diperolehi TC = 300 + 5Q Pada titik pulang modal, Jumlah Hasil(TR) = Jumlah Kos(TC), TR = Harga (P) x Kuantiti (Q) = 10Q 10Q = 300 + 5Q Q = 60 (Pada titik pulang modal, kuantiti keluaran ialah 60 kg sehari) b) Keuntungan = TR TC (i) = 10(100) (300 + 5(100)) = RM200 (untung) (ii) = 10(50) (300 + 5(50)) = RM-50 (rugi)

Life-Cycle Cost
Life-cycle cost is the summation of all

costs, both recurring and nonrecurring, related to a product, structure, system, or service during its life span. Life cycle begins with the identification of the economic need or want ( the requirement ) and ends with the retirement and disposal activities.

PHASES OF THE LIFE CYCLE

Cost Percentage

100 75

Acquisition Phase

Operation Phase Time

Life-Cycle Cost

Investment Cost or capital investment is the capital (money) required for most activities of the acquisition phase; Working Capital refers to the funds required for current assets needed for start-up and subsequent support of operation activities; Operation and Maintenance Cost includes many of the recurring annual expense items associated with the operation phase of the life cycle; Disposal Cost includes non-recurring costs of shutting down the operation; Scraps Value = Market Value Disposal Cost

Production Cost

Overhead consists of plant operating costs that are not direct labor or material costs

indirect costs, overhead and burden are the same;

The common method to allocate overhead costs is allocating this costs among products, services and activities in proportion the sum of direct labor and materials cost or machine hour;

Accounting and Its Relationship to Engineering Economy

Two classifications 1. Financial Accounting 2. Cost Accounting Accounting studies thus are concerned with past and current financial events. Somewhat like a data recorder in a scientific experiment.

Financial Accounting
Related to business record and report At the end of process, financial statement

such as profit-and-loss statement, balance sheet, business account and income statement.

Financial Accounting

Fundamental Accounting Equation: Assets = Liabilities + owners equity Assets those things of monetary value that the firm possesses. Liabilities those things of monetary value that the firm owes. Owners equity the worth of what the firm owes to its stockholder.

The fundamental accounting equation defines the format of the balance sheet.

Balance Sheet
XYZ Firm Balance Sheet As of 31 Dec, 2003 Assets Cash Accounts Receivable Liabilities and Owners' Equity RM6,000Liabilities RM6,000Notes Payable Accounts Payable Total liabilities Tools and equipment RM5,000Owners' equity Capital Stock Retained Earnings Total RM17,000Total RM3,000 RM2,000 RM5000 RM17,000 RM12,000 RM12,000

Total owners' equity

Account Types
Factory account all costs and expenses

involve in production process at a account period. Total of that costs named production cost in factory and then will be transfer to business account. Business account provided to get gross profit ( compare sold value with cost of goods sold)

Continue
Gross profit = Total Revenue Sell cost Profit-and-loss statement : will be provided after business account to determine net profit/loss from overall business operation in a account period. Net profit/loss = gross profit/loss supporting cost

Cost Accounting
Is a phase of accounting that is of

particular importance in engineering economics analysis because it is concerned principally with decision making and control in a firm. Cost accounting is the source of much of the cost data needed in making engineering economy study.

Cost Accounting
Objective: Determination of the actual costs of products or services Provision of a rational basis for pricing goods or services Provision of means for allocating and controlling expenditures Provision of information on which operating decisions may be based and means of which operating decisions may be evaluated

Cost Accounting
direct materials Raw materials inventory Direct labor + factory overhead Cost of goods sold Total expenses Work inventory in progress

Finished goods inventory

Selling & administrative expenses

Cost Accounting
Standard Cost Accounting Analysis Monthly Demand Price Foundry Time (hrs) Metalwork Time (hrs) Total Time Foundry Cost Metalwork Cost Raw Material Cost Total Cost Profit per Unit Streetcars Rail coach 15 $280 3 1.5 4.5 $136.88 $ 30.94 $120.00 $287.81 $ (7.81) 40 $350 2 4 6 $ 91.25 $ 82.50 $ 60.00 $233.75 $116.25