Chapter 3 Cost Concept

CHAPTER 3CHAPTER 3

Production Cost Concepts and Production Cost Concepts and Application Application

Cost ConceptsCost Concepts

An An opportunity costopportunity cost is the cost of the best is the cost of the best rejected ( i.e., foregone ) opportunity and rejected ( i.e., foregone ) opportunity and is hidden or impliedis hidden or implied

Social cost – cause by existing negative Social cost – cause by existing negative impact from economy activities. Example : impact from economy activities. Example : pollution, traffic-jam, inflation. pollution, traffic-jam, inflation.


Direct costsDirect costs can be reasonably measured and can be reasonably measured and allocated to a specific output or work activity -- allocated to a specific output or work activity -- labor and material directly allocated with a labor and material directly allocated with a product, service or construction activity;product, service or construction activity;

Indirect costsIndirect costs are difficult to allocate to a specific are difficult to allocate to a specific output or activity -- costs of common tools, output or activity -- costs of common tools, general supplies, and equipment maintenance ;general supplies, and equipment maintenance ;


A A sunk costsunk cost is one that has occurred in the is one that has occurred in the past and has no relevance to estimates of past and has no relevance to estimates of future costs and revenues related to an future costs and revenues related to an alternative course of action.alternative course of action.

Sunk cost = Book value – Market Sunk cost = Book value – Market ValueValue


An An Explicit costExplicit cost is an easy accounted cost, such as is an easy accounted cost, such as wage, rent and materials. It can be transacted in the wage, rent and materials. It can be transacted in the form of money payment and is lost directlyform of money payment and is lost directly

An An implicit costimplicit cost occurs when one foregoes an alternative occurs when one foregoes an alternative action but does not make an actual payment action but does not make an actual payment

Example- A firm's use of its own capital. Capital could Example- A firm's use of its own capital. Capital could have been rented to another firm instead. So the implicit have been rented to another firm instead. So the implicit cost is the pay of rentcost is the pay of rent

Cost Classification & Cost CurveCost 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.


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.


Total Cost (TC) = FC + VCTotal Cost (TC) = FC + VC

TC

VC

FC500

Quantity,Q

Cost (RM)

Create Linear Cost EquationCreate Linear Cost Equation

TC = FC + VC TC = FC + VC Cost, C = FC + aQ Cost, C = FC + aQ

a= average variable costa= average variable cost

Contoh 3.1Contoh 3.1 : :

Pengeluaran 1 Kg kopi memerlukan kos berubah =RM5 danPengeluaran 1 Kg kopi memerlukan kos berubah =RM5 danKos tetap sehari = RM300. Kos tetap sehari = RM300. a)a) Terbitkan persamaan linear kos pengeluaran kopi.Terbitkan persamaan linear kos pengeluaran kopi.b)b) Kirakan kos pengeluaran bagi 1,000 Kg kopi diproses dalam sehari.Kirakan kos pengeluaran bagi 1,000 Kg kopi diproses dalam sehari.

Penyelesaian:Penyelesaian:a)a) Diberi FC = RM300 / hari, VC = RM5 / KgDiberi FC = RM300 / hari, VC = RM5 / Kg Jumlah kosJumlah kos, , TC = F + aQ = 300 + 5QTC = F + aQ = 300 + 5Q

b) Bagi 1,000 Kg kopi, b) Bagi 1,000 Kg kopi, TC = (300/hari)(1 hari) + (5 /Kg) x (1000 Kg/hari)(1 hari)TC = (300/hari)(1 hari) + (5 /Kg) x (1000 Kg/hari)(1 hari) = 300 + 5(1000)= 300 + 5(1000) = = RM 5,300 /=RM 5,300 /=

Profit and Breakeven PointProfit and Breakeven Point

Profit = Total Revenue,TR – TCProfit = Total Revenue,TR – TC Profit = (P x Q) – (FC + VC)Profit = (P x Q) – (FC + VC) Breakeven Point happen whenBreakeven Point happen when

TR = TCTR = TC

Profit and Breakeven PointProfit and Breakeven Point

TC

VC

FC500

Quantity, Q

Cost (RM)TR

BP

Profit

Loss

Contoh 3.3Contoh 3.3 : :Daripada Contoh 3.1, Daripada Contoh 3.1, Persamaam linear Jumlah kos, TC = 300 + 5QPersamaam linear Jumlah kos, TC = 300 + 5QKatakan kopi dijual RM10 per Kg.Katakan kopi dijual RM10 per Kg.a)a) Hitungkan titik pulang modal.Hitungkan titik pulang modal.b)b) Keuntungan jika syarikat mengeluarkan / menjual kopiKeuntungan jika syarikat mengeluarkan / menjual kopi

(i) 100 Kg sehari (ii) 50 Kg sehari(i) 100 Kg sehari (ii) 50 Kg sehari

Penyelesaian:Penyelesaian:a)a) Diperolehi TC = 300 + 5QDiperolehi TC = 300 + 5Q Pada titik pulang modal, Jumlah Hasil(TR) = Jumlah Pada titik pulang modal, Jumlah Hasil(TR) = Jumlah

Kos(TC),Kos(TC), TR = Harga (P) x Kuantiti (Q) = 10QTR = Harga (P) x Kuantiti (Q) = 10Q 10Q = 300 + 5Q10Q = 300 + 5Q Q = 60 Q = 60 (Pada titik pulang modal, kuantiti keluaran ialah 60 kg (Pada titik pulang modal, kuantiti keluaran ialah 60 kg

sehari)sehari)

b) Keuntungan = TR – TCb) Keuntungan = TR – TC (i) = 10(100) – (300 + 5(100)) = RM200 (untung)(i) = 10(100) – (300 + 5(100)) = RM200 (untung) (ii) = 10(50) – (300 + 5(50)) = RM-50 (rugi)(ii) = 10(50) – (300 + 5(50)) = RM-50 (rugi)

Life-Cycle CostLife-Cycle Cost

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

PHASES OF THE LIFE CYCLEPHASES OF THE LIFE CYCLE

Time

Cost

Perc

enta

ge

75

100

Operation Phase

Acquisition Phase

Life-Cycle CostLife-Cycle Cost Investment CostInvestment Cost or capital investment is the capital or capital investment is the capital

(money) required for most activities of the acquisition (money) required for most activities of the acquisition phase;phase;

Working CapitalWorking Capital refers to the funds required for current refers to the funds required for current assets needed for start-up and subsequent support of assets needed for start-up and subsequent support of operation activities;operation activities;

Operation and Maintenance CostOperation and Maintenance Cost includes many of the includes many of the recurring annual expense items associated with the recurring annual expense items associated with the operation phase of the life cycle;operation phase of the life cycle;

Disposal CostDisposal Cost includes non-recurring costs of shutting includes non-recurring costs of shutting down the operation;down the operation;

Scraps Value = Market Value –Disposal CostScraps Value = Market Value –Disposal Cost

Production CostProduction Cost

OverheadOverhead consists of plant operating costs that consists of plant operating costs that are not direct labor or material costsare not direct labor or material costs indirect costs, overhead and burden are the same;indirect costs, overhead and burden are the same;

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

Accounting and Its Relationship to Accounting and Its Relationship to Engineering EconomyEngineering Economy

Two classificationsTwo classifications

1. Financial Accounting 1. Financial Accounting

2. Cost Accounting2. Cost Accounting

Accounting studies thus are concerned with past Accounting studies thus are concerned with past and current financial events.and current financial events.

Somewhat like a data recorder in a scientific Somewhat like a data recorder in a scientific experiment.experiment.

Financial AccountingFinancial Accounting

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

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

Financial AccountingFinancial Accounting

Fundamental Accounting Equation:Fundamental Accounting Equation:Assets = Liabilities + owners’ Assets = Liabilities + owners’

equityequity Assets – those things of monetary value that the firm Assets – those things of monetary value that the firm

possesses.possesses. Liabilities – those things of monetary value that the firm Liabilities – those things of monetary value that the firm

owes.owes. Owners’ equity – the worth of what the firm owes to its Owners’ equity – the worth of what the firm owes to its

stockholder.stockholder.

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

Balance SheetBalance SheetXYZ Firm Balance SheetXYZ Firm Balance Sheet

As of 31 Dec, 2003As of 31 Dec, 2003

Assets Liabilities and Owners' Equity

Cash RM6,000 Liabilities

Accounts Receivable RM6,000 Notes Payable RM12,000

Accounts Payable

Total liabilities RM12,000

Tools and equipment RM5,000 Owners' equity

Capital Stock RM3,000

Retained Earnings RM2,000

Total owners' equity RM5000

Total RM17,000 Total RM17,000

Account TypesAccount Types

Factory account – all costs and expenses Factory account – all costs and expenses involve in production process at a account involve in production process at a account period. Total of that costs named period. Total of that costs named production cost in factory and then will be production cost in factory and then will be transfer to business account.transfer to business account.

Business account provided to get gross Business account provided to get gross profit ( compare sold value with cost of profit ( compare sold value with cost of goods sold)goods sold)

Continue Continue

Gross profit = Total Revenue – Sell costGross profit = Total Revenue – Sell cost Profit-and-loss statement :Profit-and-loss statement : will be provided after business account to will be provided after business account to

determine net profit/loss from overall determine net profit/loss from overall business operation in a account period. business operation in a account period.

Net profit/loss = gross profit/loss – Net profit/loss = gross profit/loss – supporting costsupporting cost

Cost AccountingCost Accounting

Is a phase of accounting that is of Is a phase of accounting that is of particular importance in engineering particular importance in engineering economics analysis because it is economics analysis because it is concerned principally with decision making concerned principally with decision making and control in a firm.and control in a firm.

Cost accounting is the source of much of Cost accounting is the source of much of the cost data needed in making the cost data needed in making engineering economy study.engineering economy study.


Objective:Objective: Determination of the actual costs of products or Determination of the actual costs of products or

servicesservices Provision of a rational basis for pricing goods or Provision of a rational basis for pricing goods or

servicesservices Provision of means for allocating and controlling Provision of means for allocating and controlling

expendituresexpenditures Provision of information on which operating Provision of information on which operating

decisions may be based and means of which decisions may be based and means of which operating decisions may be evaluatedoperating decisions may be evaluated


Work inventory in progress

Finished goods inventory

Cost of goods sold

Raw materials inventory

Direct labor + factory overhead

Total expenses

Selling & administrative expenses

direct materials


Standard Cost Accounting

Analysis Streetcars Rail coach

Monthly Demand 15 40

Price $280 $350

Foundry Time (hrs) 3 2

Metalwork Time (hrs) 1.5 4

Total Time 4.5 6

Foundry Cost $136.88 $ 91.25

Metalwork Cost $ 30.94 $ 82.50

Raw Material Cost $120.00 $ 60.00

Total Cost $287.81 $233.75

Profit per Unit $ (7.81) $116.25

Chapter 3 Cost Concept

Documents

cost classification

cycle cost

operating

life cycle

business account

cost accounting

cost curve

cost concepts