lesson about cost

7/23/2019 Lesson About Cost

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Topic 8. Costs of production

1. The nature and types of production costs.

How much does it costs Apple Computer to manufacture each Macintosh? Or+ iphone5?

If You are a manager at Apple Computer !ou need this financial information and accounting report to"

set selling prices

determine the cost of goods sold

e#aluate the efficienc! of the compan!$s manufacturing operations.

%he nature of modern &usiness is such that all enterprises re'uire a wide #ariet! of cost data in ma(ing da!)to)da! operating decisions.

*ecisions of the highest importance depend on the accurac! of the cost data. or $e,ample anunderstatement in the cost of producing an automo&ile would result in a lower selling price than warrantedand cause losses of millions -.

In a manufacturing compan! cost accounting ser#es two important managerial o&ecti#es"

/ 01 to determine the per)unit cost of each manufactured product and

/ 02 to pro#ide management with information that will &e useful in planning future &usiness operationsand in controlling costs.

In production research retail and accounting a cost is the #alue ofmone! that has &een used up toproduce something and hence is not a#aila&le for use an!more.

More generali3ed in the field ofeconomics cost is ametricthat is totaling up as a result of a process.

Managers are most e,perienced with cost presented as monetar! e,penses in an income statement.

4ut economists use a &roader concept of cost. %o an economist cost is the #alue of sacrificed opportunities.

/ hat is the cost to !ou of de#oting 6 hours e#er! wee( to stud!ing economics of entities? It is the#alue of whate#er !ou would ha#e done instead with that 6 hours 0leisure acti#ities perhaps.

Conclusion: Costs of production are opportunit! costs.

/ 1. Costs e,ist &ecause resources are scarce and ha#e alternati#e use.

/ 2. Costs deal with forgoing the opportunit! to produce alternati#e goods

%he opportunit! cost is the #alue that the decision ma(er sacrifices at the time the decision is made and&e!ond.

/ %o illustrate this point consider an automo&ile firm that has an in#entor! of sheet steel that it purchased

for -1777777. It is planning to use the sheet steel to manufacture automo&iles

/ As an alternati#e it can resell the steel to other firms. If it resells its steel the firm would get -1277777.%he opportunit! cost of using the steel to produce automo&iles is thus -1277777.

Types of costs

Classification of costs is necessar! in order to determine the most suita&le method of accumulating andallocating cost data.

1. 8conomists distinguish &etween explicit costs and implicit costs

/ 8,plicit costs in#ol#e a direct monetar! outla! whereas implicit costs do not.

/ or e,ample an airline9s e,penditures on fuel and salaries are e,plicit costs whereas the income itforgoes &! not leasing its ets is an implicit cost.

/ %he sum total of the e,plicit costs and the implicit costs represents what the airline sacrifices when itma(es the decision to fl! one of its planes on a particular
http://en.wikipedia.org/wiki/Production_(economics)http://en.wikipedia.org/wiki/Researchhttp://en.wikipedia.org/wiki/Retailhttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Performance_metrichttp://en.wikipedia.org/wiki/Performance_metrichttp://en.wikipedia.org/wiki/Performance_metrichttp://en.wikipedia.org/wiki/Researchhttp://en.wikipedia.org/wiki/Retailhttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Performance_metrichttp://en.wikipedia.org/wiki/Production_(economics)


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2. 8conomic and accounting cost

/ Economic cost also referred to asOpportunit! cost is the #alue of the &est alternati#e sacrificed:i.e.it represents opportunities forgone.

/ In theoretical economics costused without 'ualification often means opportunit! cost

Accounting cost

/ In accounting costs are the monetar! #alue of e,penditures for supplies ser#ices la&or products

e'uipment and other items purchased for use &! a &usiness or other accounting entit!. It is the amountdenoted on in#oicesas the price and recorded in&oo((eepingrecords as an e,penseor asset cost &asis.;oo(ing to accounting there is the difference &etween e,penses and cost.

Accounting and economic costs of a firm

/ The structure of costs / Accounting costs / Economic costs

/ 1. ages of wor(ers / 177 777 / 177 777

/ 2. Interest on &orrowed loans / 57 777 / 57 777

/ 7777

Cost de oportunitate

/ >. oregone interest that the firmcould o&tain from in#esting itscapital elsewhere

/ = / 27 777

Cost de oportunitate

/ Total / 500 000 / 580 000

Expense/ cost

/ 8,pense is all e,pired costs which are deducti&le from re#enues.@ In a narrower sense the term$e,pense$ refers to operating selling or administrati#e e,penses interest and ta,es.

/ Items included in cost of manufacturing such as materials la&or and o#erhead should &e descri&ed ascosts not e,penses.

Classification of accounting expense/cost
http://en.wikipedia.org/wiki/Economic_costhttp://en.wikipedia.org/wiki/Opportunity_costhttp://en.wikipedia.org/wiki/Opportunity_costhttp://en.wikipedia.org/wiki/Invoicehttp://en.wikipedia.org/wiki/Bookkeepinghttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Cost_basishttp://en.wikipedia.org/wiki/Economic_costhttp://en.wikipedia.org/wiki/Opportunity_costhttp://en.wikipedia.org/wiki/Invoicehttp://en.wikipedia.org/wiki/Bookkeepinghttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Cost_basis


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A) ;oo(ing toeconomic elementsreflects their distri&ution &! economic content regardless of the formand the place"

/ 1 material costsB

/ 2 la&or costsB

/


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/ Manufacturing enterprises" the part of direct cost )5G + the part of indirect cost 25G

/ Merchandising % 6EG + 51G

(#erhead costs

indirect materials and suppliers 0nails lu&ricants small tools

indirect la&or costs 0maintenance and inspection la&or engineering la&or machine helpers super#isor

other indirect cost" &uilding maintenance machiner! and tool maintenance ta,es depreciation on plante'uipment

8,ample" ca&inetma(ing"

*I8C% CO%" *irect materials 0cost of lum&er - *irect la&or 0wages of Ca&inetma(er

IJ*I8C% CO% 0actor! o#erhead" *epreciation of electric ta&le saw indirect la&or 0Cleanup andanitorial wor( Indirect materials 0cost of Jails

A;;OCA%IOJ O OK8H8A* CO% depends on a cost center.

Cost center is an! segment of organi3ation or area of acti#it! for which there is a reason to accumulate

costs.

8LAM;8. A portion of the total electricit! cost for a month is incurred for the &enefit of all of acompan!9s departments.

%he cost must &e allocated to all the wor( done during the month.

$on%manufacturing Costs are those costs that are not directly incurred in manufacturing a product.

8,amples of such costs are salar! of sales personnel and ad#ertising e,penses. Nenerall! non)manufacturing costs are further classified into two categories"

elling and distri&ution Costs.

Administrati#eCosts.

Classification of cost looing to period of production: short run and long%run costs

/ elation to output" #aria&le costs 0which change in direct proportion to changes in output and fi,edcosts 0which do not change o#er wide ranges of output.

/ *egree of A#eraging" total and unit cost.

/ *hort run cost.

/ 1 elation to output"

+aria!le costs0which change in direct proportion to changes in output:

payments for materials, fuel,

transportation services, wages of workers.)

,ixed costs0which do not change o#er wide ranges of output" rental payments, a depreciation onequipment and buildings, insurance premiums, the salaries of top managers and key personnel).

/ Total cost -TC) is the sum of fixed and #aria!le costs at each le#el of output: TC,C+C

/ ,ixed cots must !e paid e#en the output of the firm is 1ero and TC ,C !ecause TC +C ,C!at +C 0

/ 2Average cost means the per unit cost. nit costs pro#ide the &asis for in#entor! #aluation and

measurement of the cost of goods sold.

%he! also pro#ide managers with information useful in"
http://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Personnelhttp://en.wikipedia.org/wiki/Advertisinghttp://en.wikipedia.org/wiki/Administration_of_businesshttp://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Personnelhttp://en.wikipedia.org/wiki/Advertisinghttp://en.wikipedia.org/wiki/Administration_of_business


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/ setting selling prices

/ deciding what products to manufacture

/ e#aluating the efficienc! of operations.


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/ saturating the regional mar(et thus ha#ing to ship product uneconomical distancesB

/ using energ! less efficientl! or ha#ing a higher defect rate.

&iseconomies of scaleare the forces that cause larger firms to produce goodsand ser#icesat increasedper)unit costs. %he concept is the opposite of economies of scale

&eterminants of decreasing returns to scale :

1. ;imited possi&ilities to control the acti#it!

2. Complecated mechanism of the coordonating of decisions


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0) ending &alance wor( in process in#entor! 277

?.compilation of cost of goods sold

&eginning &alance finished goods in#entor! 7.777

+ cost of goods manufactured 6E2.>77

total cost of finished goods a#aila&le for sale5>2.>77

;ess0) ending &alance finished goods in#entor!>.577

Cost of goods sold @8.=00

*trategic cost analysis

focuses on a firm9s relati#e cost position #is)P)#is its ri#als.

%he primar! anal!tical tool of cost anal!sis is the construction of a complete production=cost chain showingthe ma(e up of all costs.

%he second is the comparison it against the production = cost chains of important ri#al firms.

The complete production cost chain

%here are three comparisons in the complete production=cost chain where important differences in therelati#e costs of competing firms can occur"

'n the suppliersB part of the cost chain

'n the o


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edesign the product to achie#e cost reductions

lesson about cost

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