Cost Analysis : Definition of Cost, Types of Cost and Cost-output Relationship
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This document provides an overview of cost analysis concepts, including definitions of different types of costs, cost-output relationships, and break-even analysis. It defines cost as the money incurred to produce a product or service. Various types of costs are described, including fixed and variable costs. The relationship between total, average, and marginal costs at different output levels is explained using tables and graphs. The optimal production level occurs where average total cost is minimized and marginal cost equals average cost. Break-even analysis is also introduced as a tool to determine the output level required to cover total costs.
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Okay, let's solve this step-by-step:
Given: TC = 4000 + 5Q + 10Q2
Quantity (Q) = 10 units
1) Total Fixed Cost (TFC) = 4000 (Given fixed cost)
2) Average Fixed Cost (AFC) = TFC/Q
= 4000/10 = 400
3) Total Variable Cost (TVC) = 5Q + 10Q2
= 5(10) + 10(10)2 = 50 + 1000 = 1050
4) Average Variable Cost (AVC) = TVC/Q
= 1050/10 = 105
5) Average Total Cost (ATC) = TC/Q
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Okay, let's solve this step-by-step:
Given: TC = 4000 + 5Q + 10Q2
Quantity (Q) = 10 units
1) Total Fixed Cost (TFC) = 4000 (Given fixed cost)
2) Average Fixed Cost (AFC) = TFC/Q
= 4000/10 = 400
3) Total Variable Cost (TVC) = 5Q + 10Q2
= 5(10) + 10(10)2 = 50 + 1000 = 1050
4) Average Variable Cost (AVC) = TVC/Q
= 1050/10 = 105
5) Average Total Cost (ATC) = TC/Q
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That Matter’. In her latest book Lora Cecere introduces ‘which are the metrics that
matter’, ‘how to ensure strength, balance and resilience’, what are the ‘evolutions
in different sectors’, …
In this first article, Bram tries to find the balance via the Supply Chain Triangle of
Service, Cost and Cash. Next articles will define ‘how to set balanced targets’ and
‘how to make choices in function of a chosen business strategy’. We hope you
enjoy the reading.
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This document discusses different cost concepts including fixed costs, variable costs, total costs, average costs, and marginal costs. It defines each type of cost and provides examples. Fixed costs remain constant regardless of production levels, while variable costs change with output. Total costs are the sum of fixed and variable costs. Average costs are total costs divided by output. Marginal cost is the change in total cost from a one-unit change in output. The document also discusses typical total, average, and marginal cost curves and how they relate. It concludes by covering economies and diseconomies of scale.
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English - 1 - Balancing cash cost and service. The supply chain triangle.
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Nature of Costs
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The Institute of Cost and Management Accountant, England (ICMA) has defined Cost Accounting as – “the process of accounting for the costs from the point at which expenditure incurred, to the establishment of its ultimate relationship with cost centers and cost units.
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Based on the information provided, my advice to the management would be:
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2. Close down department A immediately as it is showing a negative contribution, meaning it is increasing the total losses.
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Here are the solutions to the numerical problems:
i) BEP in units = Total Fixed Cost / Contribution per unit
= Rs. 1,50,000 / (Rs. 15 - Rs. 10)
= 1,50,000/Rs. 5
= 30,000 units
ii) BEP in amount = Total Fixed Cost / P/V Ratio
= Rs. 1,50,000 / (Rs. 15 - Rs. 10)/Rs. 15
= 1,50,000/Rs. 5/Rs. 15
= Rs. 1,50,000
iii) P/V Ratio = Contribution/Sales
= (Selling Price - Variable Cost)/Selling
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Cost estimating is used to determine project costs, set prices, and evaluate investments. The top-down approach uses historical data from similar projects, while the bottom-up approach breaks costs down into small units. Costs can be categorized as fixed, variable, or incremental depending on how they change with production levels. Breakeven analysis determines the production level where total revenue equals total costs.
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- 2. Contents : Cost Analysis: 1. Cost Concept: i. Definition of Cost ii. Different types of Costs iii. Cost Control and Cost Efficiency • Cost-Output Relationship 2. Break Even Analysis: i. Meaning of BEA ii. Determinants of BEP iii. Simple Problems on BEP
- 3. Introduction to Cost Analysis ₹Cost is a major source for ‘Profit Maximization’ ₹Cost is a main consideration for ‘Every Business Decision’ ₹Cost is the matter for ‘Every Activity of Business’ ₹Cost is a issue for acquisition of ‘Factors of Production’ ₹Cost is subject for expansion of ‘Business Operations’ ₹Cost is a weapon to fight with ‘Market Competition’ ₹Cost is a question for ‘Success of a Technology’ ₹Cost is significant to attain ‘Customer Satisfaction’ ₹Cost is a foremost challenge to ‘Entrepreneurial Success’ ₹Cost is an important aspect to ‘Managerial Economist’
- 4. Definition of Cost • Cost refers to the money incurred to produce a particular product or service. • All costs involve a sacrifice of some kind or other to acquire some benefit • Cost incurred to perform all the activities of a business process where starting from purchase factors of production to selling of product in market. • Cost is called as ‘Cost of Production’ • Cost of Production - ‘Total Cost of Business Activities’
- 5. Types of Cost S.NO. COST CONCEPTS BASIS 1 Short Run Cost vs. Long Run Costs Time Factor 2 Variable Cost vs. Fixed Costs Degree of Variability 3 Opportunity Cost vs. Outlay Cost Nature of Sacrifice 4 Past Cost vs. Future Cost Degree of Anticipation 5 Separate Cost vs. Joint Cost Unit of Operation 6 Out of Pocket Cost vs. Book Cost Involvement of Cash flow 7 Incremental Cost vs. Sunk Cost Increasing level of Activity 8 Escapable Cost vs. Unavoidable Cost Degree of Compulsion 9 Controllable vs. Non-controllable Cost Degree of Controllability 10 Replacement Cost vs. Historical Cost Timing of Valuation 11 Urgent Cost vs. Postponable Cost Degree of Urgency
- 6. Cost-Output Relationship • Understanding the nature and behavior of costs is must for regulation and control of cost of production. • The cost of production depends on many forces and an understanding of the functional relationship of cost to various forces like Output is an important factor. • It is to determine the optimum level of production. • Cost-Output relation helps the manager in cost control, profit prediction, pricing, promotion etc. • Cost function is C = f (S,O,P,T….n) • Cost function is Cost – Output Relation
- 7. Cost-Output Relation • Total costs is the actual money spent to produce a particular quantity of output. Total cost is the summation of Total Fixed and Variable cost • Formula to calculate : TC = TFC + TVC • Average Cost : AC = TC/Q • Average Fixed Cost : AFC = TFC/Q • Average Variable Cost : AVC = TVC/Q • Marginal Cost (MC) is the addition to the total cost due to the production of an additional unit of product • MC = Change in Total Cost / Change in Total Output
- 8. Cost-Output Relationship Units of Outpu t (Q) Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC=TFC +TVC) Averag e Fixed Cost (AFC=T FC/Q) Average Variable Cost (AVC = TVC/Q) Average Cost (AC=TC/ Q) Marginal Cost (MC) 1 60 20 2 60 36 3 60 42 4 60 64 5 60 95 6 60 132
- 10. Graph: Cost-Output Relationship MC ATC AVC AFC Average Fixed Cost (AFC) curve continues to fall as output rises an account of its spread over more and more units Output
- 11. Graph: Cost-Output Relationship MC ATC AVC AFC Average Variable Cost (AVC) curve first falls and than rises due to the operation of the law of variable proportions
- 12. Graph: Cost-Output Relationship MC ATC AVC AFC The behavior of ATC curve depends upon the behavior of AVC and AFC curve. Initial stage of production both AVC and AFC decline and hence ATC also decline still AFC =AVC. But after a certain point AVC starts rising so ATC also rise
- 13. Graph: Cost-Output Relationship MC ATC AVC AFC ATC curve is U shaped because AVC starts increasing and AVC >AFC. The lowest point in ATC curve indicates the least- cost combination of inputs
- 14. Graph: Cost-Output Relationship MC ATC AVC AFC Where ATC is minimum and the MC curve intersects AC curve. It is the point where per unit cost of production will be lowest.
- 15. Why Cost-Output Relationship 1. To determine Least Cost Combination of inputs 2. To understand the behavior of ATC curve, Why It is U-Shaped 3. To know the affect of AVC curve on behavior of ATC 4. To know where the total ATC is the minimum and where the MC curve intersects ATC curve
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