COST CONCEPTS, AND CLASSIFICATIONS

   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  Establish benchmarks for productivity improvement programs

Cost Viewpoints

   Manufacturing Cost Structure

Viewpoint

   Fixed/Variable Viewpoint

   Past/Future Viewpoint

   Life Cycle Viewpoint Manufacturing Costs

Direct Direct Manufacturing

Labor Overhead

  Materials The Product The Product 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.

  Example: Wages paid to automobile assembly workers 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. All executive, organizational, and clerical costs. Manufacturing Cost Flows Work in Direct Labor

  Balance Sheet Costs Inventories Income Statement Expenses

  Material Purchases Raw Materials Selling and Administrative

  Period Costs Finished Goods

  Cost of Goods Sold

  Selling and Administrative Manufacturing Overhead

  Work in Process Direct Labor 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 c o s

  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.

   Total fixed costs remain unchanged 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.

   Successive relevant ranges are often represented graphically as a step function.

   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.

  Minutes Talked

  T o ta lL o n g D is ta n ce

  T e le p h o n e B ill Variable Cost Per Unit

The cost per long distance minute talked is constant. For example, 10 cents per minute

  e rg a h C e te n u o in h p

  M r le e e

  P T

  Minutes Talked 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 ill Fixed Cost Per Unit

The average cost per local call decreases as more local calls are made

  ill B e e n n o o h p le e T c ll si a a

  B lC ly ca o th L n r o e

  M p

  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. activity level changes.

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: Example: If you were If you were

  not attending college, you could be earning $15,000 per year. Your opportunity cost of attending college for one year is $15,000.

  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: Example: You bought an automobile that cost You bought an automobile that cost

  $10,000 two years ago. The $10,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $10,000 cost.

LIFE-CYCLE COST LIFE-CYCLE COST

  Life-cycle cost is the summation of all costs, Life-cycle cost is the summation of all costs, both recurring and nonrecurring, related to a both recurring and nonrecurring, related to a

product, structure, system, or service during product, structure, system, or service during

its life span. its life span.

  Life cycle begins with the identification of Life cycle begins with the identification of 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.

   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

   Salvage Value / disposal cost includes non-recurring costs of shutting down the operation;

  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

   etc.

  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.

  COST, VOLUME, and BREAKEVEN POINT RELATIONSHIP

   Price-Demand Relationship

• Perfect Competition •Perfect Competition

  Price Price

• Product Substitution

  p = a - bD Monopoly Oligopoly

  Units of Demand

Total Revenue Function al R e ve n u e

  TR = Price x Demand Substitute p = a - bD TR = aD - bD ² 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}

• * Maximum profits may not be obtained by maximizing revenue

   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

  C t

  /dD;

  C = C + C _{T F v} C = (c ) (D) where c is the variable cost per unit _{v v v} Total Revenue Max Profit

  

Case 1:

C _T

  Demand is function of price Profit D , D = breakeven points; Total Rev = Total Cost _{1 2} D* = Optimal demand for maximum profit D* = Optimal demand for maximum profit C C _v C _F Profit(loss) = total revenue - total costs D D ₁ D* ₂ ² = (aD-bD ) - (C + c _{F v}

  D) Volume (Demand) Take derivative and set to zero a  D  b a  c v

• Optimal

D

  = 2b

• (C

  

C

f

  f ) }

  2

  ]

  ] + { [ (a / b ) - C v

   - [ ( a / b ) - C v

   Using the quadratic formula:

  

C

f

  ] D -

  C v

   - D / b + [ (a / b) -

  How would you calculate economic breakeven points?

  ] D -

  C v

  / b + [ (a / b) -

  2

   - D

  v ) D

  2 ) / b = C f

   ( aD - D

   Occurs where TR = C t

  2

  

1

and D’

  BREAKEVEN POINT D’

  1/2 D’ =

• ( 4 / b ) ( - C
• 2 / b

Breakeven Point TR C

  _T ^{Breakeven Point Profit} Case 2

  When price is independent of demand Total revenue = total cost

  Volume (Demand) Fixed Costs Variable Costs C _F ^Loss D c C D p _{F v}

     

  D’ D ´ = C _F (p-c _v ) 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 penjualan produk mencapai keuntungan yang maksimal. Berapa jumlah produk yang direncanakan untuk dijual per tahun agar harapan tersebut tercapai.