COST CONCEPTS, AND
CLASSIFICATIONS
COST ESTIMATING USED TO
Provide information used in setting a selling price for quoting, bidding, or evaluating contracts
Determine whether a proposed product can be made and distributed at a profit (EG: price = cost + profit)
Evaluate how much capital can be justified for process changes or other improvements
process changes or other improvements
Cost Viewpoints
Manufacturing Cost Structure
Viewpoint
Fixed/Variable Viewpoint
Past/Future Viewpoint
Life Cycle Viewpoint
Direct Materials
Direct Labor
Manufacturing Overhead
Manufacturing Costs
Direct Materials
Those materials that become an integral part of the product and that can be conveniently traced directly
to it.
Example: A radio installed in an automobile
Direct Labor
Those labor costs that can be easily traced to individual units of product.
Manufacturing costs that cannot be traced directly to specific units produced.
Manufacturing Overhead
Exes: Indirect labor and indirect materials
Wages paid to employees who are not directly involved in
production work.
Examples: maintenance workers, janitors and security guards.
Materials used to support the production process.
Examples: lubricants and cleaning supplies used in the automobile assembly plant.
Nonmanufacturing Costs
Marketing and Selling
Cost Administrative Cost
Costs necessary to get the order and deliver the product.
Manufacturing Cost Flows
Work in Direct Labor Balance Sheet Costs Inventories Income Statement ExpensesMaterial Purchases Raw Materials
Indirect labor cost Indirect Others cost v e rh e a d c o s t in g c o s t Adm. cost Selling cost taxes Profit S e ll in g a n d A d m in is tr a ti v e u c ti o n C o s t e ll in g P ri c e C o s t P ri m e C o s t Direct Labor Direct Material labor cost Indirect
Material cost O
v
e
rh cos
M a n u fa c tu ri n g P ro d u c ti S e ll in Cost component
Cost structure base on product manufacturing
Cost Classifications for
Predicting Cost Behavior
How a cost will react to How a cost will react to changes in the level of
business activity.
Total variable costs
Total variable costs
change when activity changes.
Fixed and Variable Viewpoint
A Fixed Cost (FC) is any cost that does not vary in proportion to the quantity of output.
Examples include rent, depreciation, lighting, and supervisor salaries.
Fixed Costs are commonly fixed only over a certain range of
Fixed Costs are commonly fixed only over a certain range of production, called the relevant range.
For example supervisor salaries or lighting are fixed for one shift operation but step to a new higher level for two shift operation.
A Variable Cost (VC) is a cost that varies in
proportion to the quantity of output.
Common examples include direct materials and direct labor.
Variable Costs are often represented as a linear function of output
VC(x) = rate * x; where x is the level of production
Total Cost is the sum of fixed costs and variable
costs
TC(x) = FC + VC(x)
Example: Total Variable Cost
Your total long distance telephone bill is
based on how many minutes you talk.
Variable Cost Per Unit
The cost per long distance minute talked is
constant. For example, 10 cents per minute.
Total Fixed Cost
Your monthly basic telephone bill probably does not change when you make more local calls.
Number of Local Calls
M
o
n
th
ly
B
a
si
c
T
e
le
p
h
o
n
e
B
Fixed Cost Per Unit
o n e B illThe average cost per local call decreases as more local calls are made.
Number of Local Calls
Cost Classifications for
Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes the same even when the down as activity level goes up.
The Past/Future Viewpoint
The Past/Future viewpoint focuses on when costs
and revenues occur relative to “time now”.
A past cost is any cost that occurred prior to “time
now”. now”.
A future cost is any cost that is expected to occur
subsequent to “time now”.
Similar interpretations apply to past revenue and
future revenue.
Opportunity Costs
The potential benefit that is given up when one alternative is
selected over another.
Example: If you were
Example: If you were
not attending college, you could be earning $15,000 per year.
Costs Related to Decision Making
Opportunity Costs - costs when taking one action
requires giving up the opportunity to earn profits from a different action
Nike Inc. has limited production capacity. What
Nike Inc. has limited production capacity. What would be Nike’s opportunity cost of accepting a special order from the military for combat boots?
If Nike accepts the special order, they may not be able to produce enough product for other sales. So, Nike would lose the profit from the other sale.
Sunk Costs
Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when
making decisions.
Example: You bought an automobile that cost
Example: You bought an automobile that cost
$10,000 two years ago. The $10,000 cost is sunk
LIFE-CYCLE COST
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
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
Life cycle begins with the identification of
the economic need or want ( the
requirement ) and ends with the retirement
and disposal activities.
Life cycle begins with the identification of
the economic need or want ( the
requirement ) and ends with the retirement
and disposal activities.
The Life Cycle viewpoint focuses on when cash flows occur within the life cycle of an asset’s (or project’s) service life.
Investment cost is the capital (money) required for most activities of the acquisition phase;
Operating and Maintenance (O&M) Costs
Operating and Maintenance (O&M) Costs
LCC-Investment Costs
Investment cost are the costs required to place the asset in service.
Purchase Cost
Training Cost
Training Cost
Shipping and Installation Cost
Initial Tooling Cost
Supporting Equipment Cost
Site Preparation
LCC- O&M Costs
Operating and Maintenance (O&M) Costs are the
routine costs required to keep the asset in service.
A wide variety of costs may be considered here
A wide variety of costs may be considered here depending on the situation.
Energy Costs
Routine Maintenance (lubricants, filters, etc.)
Indirect Labor
LCC-Salvage Value
Salvage Value is the net cash flow resulting from
disposing of the asset or terminating the project.
Salvage Value may be positive or negative.
Salvage Value is determined by deducting the
Salvage Value is determined by deducting the cost of disposal from the market value of the asset at the time of disposal.
Salvage value is typically one of the most difficult values to estimate.
Price-Demand Relationship
Price •Perfect Competition
IEG2H2-w2 29
p = a - bD
Units of Demand
Price •Perfect Competition
•Product Substitution
Total Revenue Function
al
R
e
ve
n
u
e
TR = Price x Demand
Substitute p = a - bD
TR = aD - bD2
Demand that will produce max revenue?
dTR/dD = a-2bD = 0
Demand
T
ot
al dTR/dD = a-2bD = 0
D’= a/2b
How would you guarantee that D’
maximizes total revenue?
D’=a/2b
PROFIT MAXIMIZATION D*
Occurs where total revenue exceeds total
cost by the greatest amount;
Occurs where marginal cost = marginal
Occurs where marginal cost = marginal revenue;
Occurs where dTR/dD = d Ct /dD;
PROFIT MAXIMIZATION D*
Total Revenue CT C Profit Max ProfitCT= CF+ Cv
Cv= (cv) (D) where cvis the variable cost per unit
Case 1:
Demand is function of price
D1, D2= breakeven points; Total Rev = Total Cost D* = Optimal demand for maximum profit
Volume (Demand)
CF Cv
D1 D* D2
D* = Optimal demand for maximum profit
Profit(loss) = total revenue - total costs
= (aD-bD2) - (C
F+ cvD)
Take derivative and set to zero
Optimal D* =
b a D 0
BREAKEVEN POINT D’
1and D’
2 Occurs where TR = Ct
( aD - D2 ) / b = Cf + (Cv ) D
- D2 / b + [ (a / b) - C
v ] D - Cf
How would you calculate economic breakeven points?
- D / b + [ (a / b) - Cv ] D - Cf
Using the quadratic formula:
- [ ( a / b ) - Cv ] + { [ (a / b ) - Cv ] 2 - ( 4 / b ) ( - Cf ) }1/2
D’ =
---2 / b
Breakeven Point
TR
CT
Breakeven Point Profit
Case 2
When price is independent of demand
Total revenue = total cost
Volume (Demand) Fixed Costs Variable Costs
CF
Loss
D c C
D
p F v
D’
Example: 2-7
A company produces an electronic timing switch that is used in consumer and
commercial products made by several other manufacturing firms. The fixed cost Cf is
$73,000 per month, and the variable cost Cv is $83 per unit. The selling price per unit is
$83 per unit. The selling price per unit is p=$180-0.02(D). For this situation,
a. Determine the optimal volume for this product
and confirm that a profit occurs at this demand.
b. Find the volumes at which breakeven occurs;
that is, what is the domain of profitable demand?
Contoh-3
Sebuah perusahaan merencanakan membuat suatu produk;
Departemen penjualan mengestimasikan bahwa jumlah produk yang akan terjual sangat tergantung dari harga jual per unit. Bila harga jual per unit naik maka jumlah yang terjual akan menurun. Secara numerik diformulasikan sbb:
P = 35000 - 20 Q
dimana P = harga jual per unit.
Q = jumlah produk terjual per tahun
Dilain pihak, manajemen mengestimasikan bahwa rata-rata biaya Dilain pihak, manajemen mengestimasikan bahwa rata-rata biaya pembuatan dari produk tersebut akan menurun sesuai dengan kenaikan jumlah unit terjual. Mereka mengestimasikan :
C = 4000 Q + 8 juta
dimana C = biaya produksi dari penjualan Q per tahun.
Manajemen Perusahaan mengharapkan hasil produksi dan
