CHAPTER 2-COST CONCEPT.ppt

ENGINEERING ENGINEERING ECONOMY ECONOMY BPK 30902BPK 30902Chapter 2 Chapter 2

Prepared by: Dr.S.ThamizhmaniiPrepared by: Dr.S.Thamizhmanii

PRODUCTIONPRODUCTION

It is process to convert raw It is process to convert raw materials into useful quality materials into useful quality products. products.

COST CONCEPTCOST CONCEPT

Cost or expense word has different meaning Cost or expense word has different meaning in usage.in usage.

COST TERMINLOYCOST TERMINLOY

Cost estimation is total cost of project with certain Cost estimation is total cost of project with certain assumptions and include total amount spent. assumptions and include total amount spent. Estimation is based on engineering design and Estimation is based on engineering design and forecast of the business. forecast of the business.

It is difficult job to ascertain the cost as estimate. It is difficult job to ascertain the cost as estimate. Cost estimation is integral part of a comprehensive Cost estimation is integral part of a comprehensive

planning and design process requiring the planning and design process requiring the active participation of not only engineering active participation of not only engineering designers but also personnel from marketing, designers but also personnel from marketing, manufacturing, finance and top management. manufacturing, finance and top management.


Reasons for cost estimation:Reasons for cost estimation: 01. Providing information used in setting a selling 01. Providing information used in setting a selling

price, bidding, or evaluating contracts. price, bidding, or evaluating contracts. 02. To determine whether a product can be 02. To determine whether a product can be

produced and sellable in the market with profit. produced and sellable in the market with profit. 03. Helps to justify how much money can be 03. Helps to justify how much money can be

spent on project, change of process, and for other spent on project, change of process, and for other improvements. improvements.

04. Establish benchmarks for productivity 04. Establish benchmarks for productivity programs.programs.


Two approach for cost estimation. They Two approach for cost estimation. They are:are:

01. Bottom up 01. Bottom up 02. Top down 02. Top down


BOTTOM UP: Product costs are BOTTOM UP: Product costs are associated with direct or indirect costs. associated with direct or indirect costs. Direct costs are easily assignable to a Direct costs are easily assignable to a specific product, while indirect costs are specific product, while indirect costs are not easily allocated to a product. Ex. Direct not easily allocated to a product. Ex. Direct cost would be the wages of a machine cost would be the wages of a machine operator, indirect costs would be operator, indirect costs would be supervision. supervision.


Bottom up: It is more detailed method of Bottom up: It is more detailed method of approach. It is break down into small units, approach. It is break down into small units, manageable units and to estimate their manageable units and to estimate their economic consequences. economic consequences.

These smaller units are added with other These smaller units are added with other type of cost to obtain overall cost estimate.type of cost to obtain overall cost estimate.


The bottom up approach is used because The bottom up approach is used because the procedure requires require estimate of the procedure requires require estimate of cost elements at the lower levels of the cost elements at the lower levels of the cost structure which are then added cost structure which are then added together to obtain the total cost of the together to obtain the total cost of the product. product.


Top down:Top down: It uses past data from engineering projects It uses past data from engineering projects

to estimate the costs, revenues, and other to estimate the costs, revenues, and other data for the current project by modifying data for the current project by modifying the data to suit inflation, deflation, activity the data to suit inflation, deflation, activity level, weight, energy consumption, size level, weight, energy consumption, size and other factors. It can be used where and other factors. It can be used where alternatives are still being developed and alternatives are still being developed and refined. refined.

TOP DOWN APPROACHTOP DOWN APPROACH

Design to price: Estimation of selling price Design to price: Estimation of selling price is obtained by accumulating relevant fixed is obtained by accumulating relevant fixed and variable costs and then adding profit and variable costs and then adding profit margin, which is a percentage of total margin, which is a percentage of total manufacturing costs. This is termed as manufacturing costs. This is termed as Design to price. (By American Design to price. (By American Companies). Companies).


Japanese companies apply the concept of Japanese companies apply the concept of target costing, which is a top down target costing, which is a top down approach. approach.

Target costing is “ what should be the Target costing is “ what should be the product cost” instead of “what does the product cost” instead of “what does the product cost”. product cost”.

Target costing is initiated by conducting Target costing is initiated by conducting market surveys to determine the selling market surveys to determine the selling price of the best competitor’s product.price of the best competitor’s product.


Target Cost = Competitor’s price – Desired profitTarget Cost = Competitor’s price – Desired profit

Target cost = Competitor’s price / (1+ profit Target cost = Competitor’s price / (1+ profit margin in terms of percentage) margin in terms of percentage)

Target cost is obtained prior to the design of the Target cost is obtained prior to the design of the product and is used as a goal for engineering product and is used as a goal for engineering design, procurement and production. design, procurement and production.


If a product is sold in the market at RM If a product is sold in the market at RM 27.50 per piece, the profit margin is 10 % 27.50 per piece, the profit margin is 10 % expected, the target price is expected, the target price is

Target = 27.50 / (1+0.10) = RM 25.00 Target = 27.50 / (1+0.10) = RM 25.00

TOP DOWN APPROCHTOP DOWN APPROCH

A estimate for 4 year degree in an A estimate for 4 year degree in an university can be done as follows.university can be done as follows.

Cost of attending the first year degree is Cost of attending the first year degree is RM 8250.00 which include tuition fee, RM 8250.00 which include tuition fee, housing and meals. The inflation rate is housing and meals. The inflation rate is 6% per year. The other costs remain RM 6% per year. The other costs remain RM 2000 per year.2000 per year.

TOP DOWN APPROCHTOP DOWN APPROCH

Year Year Tuition fee, boarding Tuition fee, boarding and lodging and lodging

Other Other expenses expenses

Total cost Total cost estimated estimated

11 8250 x 1.06 = 87458250 x 1.06 = 8745 20002000 10745.0010745.00

22 8745 x 1.06 = 92708745 x 1.06 = 9270 20002000 11270.0011270.00

33 9270 x1.06 = 98269270 x1.06 = 9826 20002000 11826.0011826.00

44 10415 x 1.06 = 10415 x 1.06 = 1104011040

20002000 13040.00 13040.00

Total Total 46881.00 46881.00

TYPES OF COSTSTYPES OF COSTS

01. Fixed cost,01. Fixed cost, 02. Variable cost,02. Variable cost, 03. Incremental cost,03. Incremental cost, 04. Direct cost (prime cost), 04. Direct cost (prime cost), 05. Indirect cost (over head cost), 05. Indirect cost (over head cost), 06. Standard cost, 06. Standard cost, 07. Sunk cost,07. Sunk cost, 08. Opportunity cost,08. Opportunity cost, 09. Cash cost Versus book cost 09. Cash cost Versus book cost

FIXED COSTFIXED COST

Fixed costs: It is those costs are unaffected by Fixed costs: It is those costs are unaffected by any changes in the organization. It includes any changes in the organization. It includes insurance and taxes on facilities, general insurance and taxes on facilities, general management and administrative salaries, license management and administrative salaries, license fees and interest costs on borrowed capital. fees and interest costs on borrowed capital.

It tend to remain constant for specific period of It tend to remain constant for specific period of time. This cost may change when investment is time. This cost may change when investment is more and any changes occur due to expansion. more and any changes occur due to expansion.

FIXED COSTFIXED COST

The portion of the total cost that remains The portion of the total cost that remains constant regardless of output levelsconstant regardless of output levels

e.g. land, property taxes, insurance, e.g. land, property taxes, insurance, equipment, and building equipment, and building

VARIABLE COSTVARIABLE COST

The portion of the total cost that varies The portion of the total cost that varies directly with the volume of output. This directly with the volume of output. This includes direct material cost, labor cost and includes direct material cost, labor cost and direct expenses. This varies with volume of direct expenses. This varies with volume of production. production.

e.g. labor, materials, transportation, and e.g. labor, materials, transportation, and variable overhead variable overhead

Example- The costs of material and labor used in a product or service Example- The costs of material and labor used in a product or service are variable costs, because they vary in total with the number of are variable costs, because they vary in total with the number of

output units, even though theoutput units, even though the cost per unit stay thecost per unit stay the same.same.

INCREMENTAL COST /INCREMENTAL COST /INCREMENTAL REVENUEINCREMENTAL REVENUE

It is the additional cost that results It is the additional cost that results from increasing the output of a from increasing the output of a system by one or more units.system by one or more units.

DIRECT COSTSDIRECT COSTS

Those costs are that can be reasonably Those costs are that can be reasonably measured and allocated to a specific measured and allocated to a specific output or work activity. The direct costs output or work activity. The direct costs are labor and material costs directly are labor and material costs directly associated with product or service, or associated with product or service, or construction activity are direct costs. construction activity are direct costs.

Cost of cloth used for making one shirt is Cost of cloth used for making one shirt is direct cost. direct cost.

DIRECT COSTSDIRECT COSTS

Direct costs = Direct material cost + direct Direct costs = Direct material cost + direct labor costs + direct expenses labor costs + direct expenses

INDIRECT COSTINDIRECT COST

Indirect costs are that are difficult Indirect costs are that are difficult to attribute or allocate to a to attribute or allocate to a specific output or work activity. specific output or work activity.

Example: common tools, general Example: common tools, general supplies and equipment supplies and equipment maintenance in a plant are maintenance in a plant are treated as indirect cost.treated as indirect cost.

OVERHEAD COSTSOVERHEAD COSTS

It is plant operating costs that are It is plant operating costs that are not direct labor or direct materials not direct labor or direct materials costs. costs.

STANDARD COSTSSTANDARD COSTS

This costs are represented by costs per unit of output This costs are represented by costs per unit of output that are established in advance of actual production or that are established in advance of actual production or service delivery. They are from anticipated direct labor service delivery. They are from anticipated direct labor hours, materials, and overhead categories. Some costs hours, materials, and overhead categories. Some costs are:are:

01. Estimating future manufacturing costs,01. Estimating future manufacturing costs, 02. Measuring operating performance by comparing 02. Measuring operating performance by comparing

actual cost per unit with the standard unit costactual cost per unit with the standard unit cost.. 03. Establishing the value of work in process and 03. Establishing the value of work in process and

finished inventories. finished inventories.

SUNK COSTSSUNK COSTS

This is known as past cost of an This is known as past cost of an equipment or asset. equipment or asset.

Example: Let us assume that an Example: Let us assume that an equipment is purchased three years back equipment is purchased three years back for RM 100,000.00. If this is considered for for RM 100,000.00. If this is considered for replacement then this is not the cost. Then replacement then this is not the cost. Then the purchase value of the equipment in the the purchase value of the equipment in the past is known as sunk cost.past is known as sunk cost.

OPPURTUNITY COSTSOPPURTUNITY COSTS

It is the cost of the best It is the cost of the best rejected and is often hidden or rejected and is often hidden or implied. implied.

Example: Renting un used Example: Renting un used space and collect the money.space and collect the money.

CASH COST Versus CASH COST Versus BOOK COSTBOOK COST

Payment by cash is called cash cost. Payment by cash is called cash cost. Non cash/book costs-Non cash/book costs- It did not It did not

involve cash transaction. It is the involve cash transaction. It is the depreciation charged for the use of depreciation charged for the use of assets such as plant and equipment. assets such as plant and equipment.

DEPRECIATIONDEPRECIATION

It is the decrease in value due to physical It is the decrease in value due to physical properties with the passage of time and properties with the passage of time and use. This helps to reduce during the use. This helps to reduce during the balance sheet preparation. The actual balance sheet preparation. The actual depreciation can’t be achieved. depreciation can’t be achieved.

SELLING PRICE SELLING PRICE

01. Prime cost = direct material cost + direct cost+ direct 01. Prime cost = direct material cost + direct cost+ direct expensesexpenses

02. Factory cost = prime cost + Factory overhead 02. Factory cost = prime cost + Factory overhead 03. Costs of production = Factory cost+ office and 03. Costs of production = Factory cost+ office and

administrative overheadadministrative overhead 04. Cost of goods sold = Cost of production +opening 04. Cost of goods sold = Cost of production +opening

book stock –closing finished stock book stock –closing finished stock 05. Cost of sales = cost of goods sold + selling and 05. Cost of sales = cost of goods sold + selling and

distribution overhead distribution overhead 06. Sales = Cost of sales + profit 06. Sales = Cost of sales + profit 07. Selling price per unit = Sales / quantity sold 07. Selling price per unit = Sales / quantity sold

LIFE CYCLE COSTLIFE CYCLE COST

Life cycle cost is the total cost of ownership of machinery Life cycle cost is the total cost of ownership of machinery and equipments, including its cost of acquisition, operation, and equipments, including its cost of acquisition, operation, maintenance, conversion, and/or decommission. LCC are maintenance, conversion, and/or decommission. LCC are summations of cost estimates from inception to disposal summations of cost estimates from inception to disposal for both equipment and projects as determined by an for both equipment and projects as determined by an analytical study and estimate of total costs experienced in analytical study and estimate of total costs experienced in annual time increments during the project life with annual time increments during the project life with consideration for the time value of money. The objective of consideration for the time value of money. The objective of LCC analysis is to choose the most cost effective approach LCC analysis is to choose the most cost effective approach from a series of alternativefrom a series of alternatives s (note alternatives is a plural (note alternatives is a plural word) to achieve the lowest long-term cost of ownership. word) to achieve the lowest long-term cost of ownership. LCC is an economic model over the project life span. LCC is an economic model over the project life span.

LIFE CYCLE COSTLIFE CYCLE COST

Usually the cost of operation, maintenance, and disposal Usually the cost of operation, maintenance, and disposal costs exceed all other first costs many times over costs exceed all other first costs many times over (supporting costs are often 2-20 times greater than the (supporting costs are often 2-20 times greater than the initial procurement costs). The best balance among cost initial procurement costs). The best balance among cost elements is achieved when the total LCC is minimized elements is achieved when the total LCC is minimized (Landers 1996). As with most engineering tools, LCC (Landers 1996). As with most engineering tools, LCC provides best results when both engineering art and provides best results when both engineering art and science are merged with good judgment to build a sound science are merged with good judgment to build a sound business case for action. Businesses must summarize business case for action. Businesses must summarize LCC results in net present value (NPV) format LCC results in net present value (NPV) format considering depreciation, taxes and the time. considering depreciation, taxes and the time.

PRODUCT LIFE CYCLE PRODUCT LIFE CYCLE Product life-cycle (PLC)Product life-cycle (PLC) Like human beings, products also have Like human beings, products also have

an arc. From birth to death, human beings pass through various an arc. From birth to death, human beings pass through various stages e.g. birth, growth, maturity, decline and death. A similar life-stages e.g. birth, growth, maturity, decline and death. A similar life-cycle is seen in the case of products. The product life cycle goes cycle is seen in the case of products. The product life cycle goes through multiple phases, involves many professional disciplines, through multiple phases, involves many professional disciplines, and requires many skills, tools and processes. Product life cycle and requires many skills, tools and processes. Product life cycle (PLC) has to do with the life of a product in the market with respect (PLC) has to do with the life of a product in the market with respect to business/commercial costs and sales measures. To say that a to business/commercial costs and sales measures. To say that a product has a life cycle is to assert three things:product has a life cycle is to assert three things:

Products have a limited life,Products have a limited life, Product sales pass through distinct stages, each posing different Product sales pass through distinct stages, each posing different

challenges, opportunities, and problems to the seller,challenges, opportunities, and problems to the seller, Products require different marketing, financing, manufacturing, Products require different marketing, financing, manufacturing,

purchasing, and human resource strategies in each life cycle stage.purchasing, and human resource strategies in each life cycle stage.

FOUR STAGES OF PLCFOUR STAGES OF PLC

The four main stages of a product's life cycle and The four main stages of a product's life cycle and the accompanying characteristics are:the accompanying characteristics are:

Stages:Stages: 01. 01. Market introduction stage –Market introduction stage – i). costs are very highi). costs are very high ii). slow sales volumes to startii). slow sales volumes to start iii). little or no competitioniii). little or no competition iv). demand has to be creatediv). demand has to be created v). customers have to be prompted to try the productv). customers have to be prompted to try the product vi). makes no money at this stagevi). makes no money at this stage

FOUR STAGES OF PLCFOUR STAGES OF PLC 02.Growth stage: 02.Growth stage: i). costs reduced due to economies of i). costs reduced due to economies of

scalescale ii). sales volume increases significantlyii). sales volume increases significantly iii). profitability begins to riseiii). profitability begins to rise iv). public awareness increasesiv). public awareness increases v). competition begins to increase with a v). competition begins to increase with a

few new players in establishing marketfew new players in establishing market vi). increased competition leads to price vi). increased competition leads to price

decreasesdecreases


03.Maturity stage:03.Maturity stage: i). i). costs are lowered as a result of production volumes costs are lowered as a result of production volumes

increasing and experience curve effectsincreasing and experience curve effects ii). sales volume peaks and market saturation is reachedii). sales volume peaks and market saturation is reached iii). increase in competitors entering the marketiii). increase in competitors entering the market iv). prices tend to drop due to the proliferation of iv). prices tend to drop due to the proliferation of

competing productscompeting products v). brand differentiation and feature diversification is v). brand differentiation and feature diversification is

emphasized to maintain or increase market shareemphasized to maintain or increase market share vi). Industrial profits go downvi). Industrial profits go down


04. 04. Saturation and decline stage:Saturation and decline stage: i). costs become counter-optimali). costs become counter-optimal ii). sales volume declineii). sales volume decline iii). prices, profitability diminishiii). prices, profitability diminish iv). profit becomes more a challenge iv). profit becomes more a challenge

of production/distribution efficiency of production/distribution efficiency than increased salesthan increased sales

PRODUCT LIFE CYCLEPRODUCT LIFE CYCLE

BREAK EVEN POINT BREAK EVEN POINT

Break-even point (BEP) is the point at which cost Break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". A net loss or gain, and one has "broken even". A profit or a loss has not been made, although profit or a loss has not been made, although opportunity costs have been "paid", and capital opportunity costs have been "paid", and capital has received the risk-adjusted, expected return. It has received the risk-adjusted, expected return. It is shown graphically, at the point where the total is shown graphically, at the point where the total revenue and total cost curves meet. In the linear revenue and total cost curves meet. In the linear case the break-even point is equal to the fixed case the break-even point is equal to the fixed costs divided by the contribution margin per unit. costs divided by the contribution margin per unit.

BREAK EVEN POINTBREAK EVEN POINT

SOME OF THE FORMUALESOME OF THE FORMUALE

i). Total cost = Total variable cost (v) + Fixed cost (FC)i). Total cost = Total variable cost (v) + Fixed cost (FC)

Ii). Profit = Sales – (Fixed cost + Variable cost)Ii). Profit = Sales – (Fixed cost + Variable cost) = s x Q – (FC +vQ)= s x Q – (FC +vQ) Where s is selling price per unit, v is variable Where s is selling price per unit, v is variable

cost, FC is fixed cost, Q volume of production. cost, FC is fixed cost, Q volume of production. Total sales = s x Q Total sales = s x Q Break even quantity = Break even quantity =

tperunitVariableceperunitSellingpri

tFixed

cos

cos

SOME OF THE FORMULAESOME OF THE FORMULAE

Break even quantity = Break even quantity = vs

FC


Break even sales = Break even sales = vs

FCxs


Contribution = Sales – variable cost Contribution = Sales – variable cost = s – v = s – v Profit volume ratio P/V = Contribution /salesProfit volume ratio P/V = Contribution /sales = (Sales – variable cost)/Sales = (Sales – variable cost)/Sales

PROBLEM 1PROBLEM 1

Alpha associate has the following details:Alpha associate has the following details: i). Fixed cost – RM 20,00,000i). Fixed cost – RM 20,00,000 ii). Variable cost per unit = RM 100.00ii). Variable cost per unit = RM 100.00 Iii). Selling price per unit – RM 200.00Iii). Selling price per unit – RM 200.00 Find the following. Find the following. a). Break even quantity,a). Break even quantity, b). Break even sales- and b). Break even sales- and c). If the production quantity is 60,000, find c). If the production quantity is 60,000, find

contribution. contribution.

SOLUTIONSOLUTION

a). Break even a). Break even quantity =quantity =

20,00,000/200-100 = 20,00,000/200-100 = 20,000 units20,000 units

b). Break even salesb). Break even sales = =

[20,00,000x200]/(200-[20,00,000x200]/(200-100)] = 40,00,000100)] = 40,00,000

vs

FC

vs

FCxs

SOLUTIONSOLUTION

Contribution = sales – variable cost Contribution = sales – variable cost = s x Q – v x Q= s x Q – v x Q = = 200X 60,000 – 100 X 60,000200X 60,000 – 100 X 60,000 = RM 60,00,000= RM 60,00,000

PROBLEM 2 PROBLEM 2

Alpha associate has the following details:Alpha associate has the following details: i). Fixed cost – RM 25,00,000i). Fixed cost – RM 25,00,000 ii). Variable cost per unit = RM 100.00ii). Variable cost per unit = RM 100.00 Iii). Selling price per unit – RM 120.00Iii). Selling price per unit – RM 120.00 Find the following. Find the following. a). Break even quantity,a). Break even quantity, b). Break even sales- and b). Break even sales- and c). If the production quantity is 120,000, find c). If the production quantity is 120,000, find

contribution.contribution.

PROBLEM 3PROBLEM 3 A product is cast first and then machined to give it desired size and A product is cast first and then machined to give it desired size and

finish. The yearly output is 10,000.Various yearly costs are as given finish. The yearly output is 10,000.Various yearly costs are as given below. below.

01.cost of raw material including transportation cost = 14,00001.cost of raw material including transportation cost = 14,000 02. Wages to labor = 30,00002. Wages to labor = 30,000 03. Wages to technicians = 5,00003. Wages to technicians = 5,000 04. Expenditures on maintaining sales and advertising at different 04. Expenditures on maintaining sales and advertising at different

places = 10,000places = 10,000 05. Expenses on office and administrative staff = 5,000.05. Expenses on office and administrative staff = 5,000. 06. Cost of tools and fixtures = 1,000 06. Cost of tools and fixtures = 1,000 07. Selling price = 15 % on the manufacturing cost 07. Selling price = 15 % on the manufacturing cost Calculate:Calculate: 01. Prime cost, 02. Manufacturing cost and 03).Selling price if 15 % 01. Prime cost, 02. Manufacturing cost and 03).Selling price if 15 %

the profit rate on manufacturing cost. the profit rate on manufacturing cost.

SOLUTION 3SOLUTION 3 Prime cost = direct material cost + direct cost+ direct expenses= Prime cost = direct material cost + direct cost+ direct expenses=

30,000+14,000+1,000 = 45,000 30,000+14,000+1,000 = 45,000 Prime cost per product = 45,000/10,000 Prime cost per product = 45,000/10,000 = 4.5= 4.5 Factory cost /product = prime cost + Factory overhead = Factory cost /product = prime cost + Factory overhead =

(44,000+1000)/10,000(44,000+1000)/10,000 = 5 unit cost= 5 unit cost Selling price =Manufacturing cost + Profit Selling price =Manufacturing cost + Profit = Manf.cost + indirect cost + profit of 15 % = Manf.cost + indirect cost + profit of 15 %

manuf.cost) manuf.cost) = 50,000 + 10,000 + 5,000 + 15% 50,000)= 50,000 + 10,000 + 5,000 + 15% 50,000) = 72,500 for 10,000 pieces. = 72,500 for 10,000 pieces. Therefore selling price = 72,500 / 13,300 = 7.25 unit costTherefore selling price = 72,500 / 13,300 = 7.25 unit cost

PROBLEM 4PROBLEM 4 A medium scale industry incurs the following cost for one of their A medium scale industry incurs the following cost for one of their

products annually. The production volume on an average is 5000 a products annually. The production volume on an average is 5000 a year.year.

01. Raw material cost = 25,00001. Raw material cost = 25,000 02. Tool cost = 2,00002. Tool cost = 2,000 03. Cost of lubricants, cutting fluids = 1,00003. Cost of lubricants, cutting fluids = 1,000 04. Wages to labor = 10,00004. Wages to labor = 10,000 05. Office expenses = 6,00005. Office expenses = 6,000 06. Expenses on sale = 6,00006. Expenses on sale = 6,000 07. Insurance expenses = 2,000 07. Insurance expenses = 2,000 Find: a). Selling price = if 10% is profit on manf. cost Find: a). Selling price = if 10% is profit on manf. cost b). Direct cost as per cent of total cost b). Direct cost as per cent of total cost c). Indirect expenses as per cent of total cost. c). Indirect expenses as per cent of total cost.

a). Prime cost = Direct labor + Direct material+ other a). Prime cost = Direct labor + Direct material+ other direct expenses direct expenses

= 25,000+2,000+10,000+1,000 = 38,000 unit cost = 25,000+2,000+10,000+1,000 = 38,000 unit cost b). Factory overhead = wages to foreman and b). Factory overhead = wages to foreman and

supervisory staff + Expense on insurance = supervisory staff + Expense on insurance = 20,000+2,000 = 22,000 unit cost 20,000+2,000 = 22,000 unit cost

c). Establishment cost = Expenses on office staff + c). Establishment cost = Expenses on office staff + Expenses on sales, and distribution agencies = Expenses on sales, and distribution agencies = 6,000+4,000 =10,000 unit cost 6,000+4,000 =10,000 unit cost

d). Over all production cost or Total production cost = d). Over all production cost or Total production cost = a+b+c = 38,000+ 22,000+10,000 = 70,000 unit cost a+b+c = 38,000+ 22,000+10,000 = 70,000 unit cost

SOULTION 4SOULTION 4

Production cost per product = 70,000/ 5,000 = Production cost per product = 70,000/ 5,000 = 14.00 unit cost 14.00 unit cost

i). Price = 10 % of production cost i). Price = 10 % of production cost = 14 +10/100 = 15.40 unit cost = 14 +10/100 = 15.40 unit cost ii). Direct cost as percentage of total cost ii). Direct cost as percentage of total cost = 38,000 / 70,000 = 54.3 % = 38,000 / 70,000 = 54.3 % iii). Indirect cost as percentage of total cost iii). Indirect cost as percentage of total cost = [(22,000+10,000)/70,000 ] 100 = 45.7 % = [(22,000+10,000)/70,000 ] 100 = 45.7 %

CHAPTER 2-COST CONCEPT.ppt

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