2. Cost
Cost is the value of money that has been used up to produce something or deliver a service
Revenue
Is the value of all sales of goods and services recognized by a company in a period
Profit
describes the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes
involved in sustaining the activity in question. ... Profit is calculated as total revenue less total expenses
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Important Definitions
3. Fixed costs
Fixed costs are predetermined expenses that remain the same throughout a
specific period. These overhead costs do not vary with output or how the
business is performing.
Variable costs
Variable costs change directly with the output – when output is zero, the variable
cost will be zero. The total variable cost to a business is calculated by multiplying
the total quantity of output with the variable cost per unit of output.
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Important Definitions
4. Variable Cost:
Are costs that changed in total in proportion to changes in the related level of production. But it’s remains constant (fixed)
per unit.
suppose that in order to make one suit, required 5 meter of cloth and the company purchase the meter in 2 pounds.
So, direct material for make one suit = 5 meter * 2 pounds = 10 pounds
Production volume total variable cost variable cost per unit
1 10 10
5 50 10
100 1000 10
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5. Fixed Cost:
Are costs that remains unchanged (constant) in total regardless of changes in the related level of production. But fixed cost per
unit decreases with the increase in the volume of production.
Example: factory rental
Suppose that the company pay 10,000 LE for factory rental.
Production level total fixed cost fixed cost per unit
2,000 10,000 5
4,000 10,000 2,5
10,000 10,000 1
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Example
Earl’s Biking Company manufactures and sells bikes. Each bike costs $40 to make, and the company’s fixed costs
are $5000. In addition,
Earl knows that the price of each bike comes from the price function (P(X) = 300 -2X)
Find:
1. The company’s revenue function, R(x).
2. The company’s cost function, C(x).
3. The company’s profit function, P(x).
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Example
1) Revenue is equal to the number of units sold times the price per unit. To obtain the
revenue function, multiply the output level by the price function.
2) A business’ costs include the fixed cost of $5000 as well as the variable cost of $40
per bike. To obtain the cost function, add fixed cost and variable cost together.
3) The profit a business makes is equal to the revenue it takes in minus what it spends
as costs. To obtain the profit function, subtract costs from revenue.
8. Accounting
Accounting is the recording of financial transactions along with storing, sorting, retrieving, summarizing, and presenting the
results in various reports and analyses. Accounting is also a field of study and profession dedicated to carrying out those tasks.
Financial Accounting:
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions
related to a business. This involves the preparation of financial statements available for public use
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Important Definitions
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Financial Statements
The three financial statements are:
(1) Income Statement
(2) Balance Sheet
(3) Cash Flow Statement.
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Income Statement
Often, the first place an investor or analyst will look is the
income statement. The income statement shows the
performance of the business throughout each period,
displaying sales revenue at the very top. The statement
then deducts the cost of goods sold (COGS) to find gross
profit. From there, the gross profit is affected by other
operating expenses and income, depending on the nature
of the business, to reach net income at the bottom – “the
bottom line” for the business.
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Balance Sheet
The balance sheet displays the company’s assets,
liabilities, and shareholders’ equity at a point in time. As
commonly known, assets must equal liabilities plus
equity. The asset section begins with cash and
equivalents, which should equal the balance found at
the end of the cash flow statement. The balance sheet
then displays the changes in each major account from
period to period. Net income from the income
statement flows into the balance sheet as a change in
retained earnings (adjusted for payment of dividends).
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Cash Flow Statement
The cash flow statement then takes net income and adjusts it for any non-cash expenses.
Then, using changes in the balance sheet, usage and receipt of cash is found. The cash flow
statement displays the change in cash per period, as well as the beginning balance and ending
balance of cash.
Key features:
• Shows the increases and decreases in cash
• Expressed over a period of time, an accounting period (i.e., 1 year, 1 quarter, etc.)
• Show pure cash movements
• Has three sections: cash from operations, cash used in investing, and cash from financing
• Shows the net change in the cash balance from start to end of the period
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Financial Ratios
Standardize financial information for comparisons
Used to highlight weaknesses and strengths
Evaluate current operations
Compare performance with past performance
Compare performance against other firms or industry standards
Study the efficiency of operations
14. Manufacturing Costs
Manufacturing Costs:
Most manufacturing companies divide manufacturing costs
into three broad categories:
Direct Materials
Direct Labor
Manufacturing overhead.
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Direct Materials:
are those materials that become an integral part of the
finished product and that can be easily traced to it.
For example:
Wood is the direct material in a piece of wooden furniture.
Materials that are not significant on a per-unit basis and
cannot be easily traced to the finished product are termed
indirect materials. For example, glue, nails, and screws.
16. 1
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Direct Labor:
The term direct labor is reserved for those labor
costs that can be easily traced to individual units
of product.
Labor costs that are not significant on a per-unit
basis and cannot be easily traced to the finished
product are termed indirect labor.
Indirect labor includes the labor costs of
supervisors, janitors, and night security guards.
17. 1
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Manufacturing Overhead:
The third elements of manufacturing cost, includes all costs of manufacturing except direct material and direct
labor. Manufacturing overhead includes items such as indirect material, indirect labor, depreciation, heat and
light, maintenance and repairs on production equipment, and insurance on manufacturing facilities.
18. 2
Manufacturing Cost = Direct material + Direct labor + Overhead
D.M D. L O.H
Prime Cost = D.M + D.L
Conversion Cost = D. L + O.H
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19. 1
Non-manufacturing Costs:
Marketing or Selling Costs: included all costs necessary to secure
customer orders and get the finished product into the hands of the
customer. Examples of marketing costs included advertising, shipping,
sales commissions, sales salaries, and cost of finished goods
warehouses.
Administrative Costs: included all executive and organizational costs
associated with general management of an organization rather than
with manufacturing, marketing, or selling. Examples of administrative
costs include executive compensation, general accounting, secretarial,
and public relations.
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Example:
The following are some cost data for a manufacturing company for the month of January:
Raw material used in production 380,000
Direct labor 120,000
Indirect material 5,000
Supervisor salaries 100,000
Insurance- factory 10,000
Machine rental 20,000
Sales salaries 50,000
Depreciation – factory 15,000
Required: determine prime cost, conversion cost, and total manufacturing cost
21. Mixed Costs:
Is one that contains both variable cost and fixed cost such as maintenance cost.
Mixed costs equation:
Y = a + b x
In this equation:
y = the total mixed cost
a = the total fixed cost
b = the variable cost per unit
x = the level of production
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22. Analyze a mixed cost using the high-low method:
The high-low method is an estimation technique which relies on the relationship between the highest and lowest
observed values of cost.
Cost at the high production level – Cost at the low production level
Variable cost per unit =
High production level - low production level
Total fixed cost = total cost – total variable cost
Total fixed cost = total cost – ( variable cost per unit * production level)
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23. Example:
The following information has been taken from the ledger accounts of
XY company for the past 4 years:
Year production level total maintenance cost
2000 6,000 220,000
2001 5,000 200,000
2002 8,000 260,000
2003 10,000 300,000
required:
1- using high-low method, determine the cost equation for
maintenance cost.
2- Using the cost equation for maintenance cost to determine the
estimated maintenance cost for 12,000 production units.
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24. solution
1
Cost at the high production level – Cost at the low production level
Variable cost per unit =
High production level - low production level
300,000 – 200,000
Variable cost per unit = = 20 pound
10,000 – 5,000
then choice any production level and implement the second equation, such as the
high production level:
Total fixed cost = total cost – ( variable cost per unit * production level)
= 300,000 – ( 20 * 10,000) = 100,000
the cost equation for maintenance cost:
y = 100,000 + 20 x
The estimated maintenance cost for 12,000 production unit:
Y = 100,000 + 20 * 12,000 = 340,000
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26. Project Cost Management
• Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding,
managing, and controlling costs so that the project can be completed within the approved budget.
ID Process Definition
1 Plan Cost Management The process that establishes the policies, procedures, and
documentation for planning, managing, expending, and controlling
project costs.
2 Estimate Costs The process of developing an approximation of the monetary
resources needed to complete project activities.
3 Determine Budget The process of aggregating the estimated costs of individual activities
or work packages to establish an authorized cost baseline.
4 Control Costs The process of monitoring the status of the project to update the
project costs and managing changes to the cost baseline.
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27. Project Cost Management
• Types of Costs
Type Description Example
Fixed Costs Project costs that remain constant regardless to the phase or output. Set‐up
Variable Costs Project costs that vary in relation to the output. Materials,
supplies
Direct Costs Costs that are directly attributable to the work of the project Training,
travel
Indirect Costs Costs that are directly attributable to more than one project (overhead) Taxes
Cost reserves Amount of money needed above the estimate to reduce risk of overruns of
project objectives to a level acceptable to the organization
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