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Lecture 2(a)-Cost Concepts

The document discusses engineering costs, defining cost as the cash required to produce a product or service. It categorizes costs into fixed, variable, direct, and indirect, and explains their implications in manufacturing and non-manufacturing contexts. Additionally, it introduces concepts like marginal cost, standard cost, controllable cost, sunk cost, and opportunity cost as essential tools for decision-making in engineering economy.

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6 views

Lecture 2(a)-Cost Concepts

The document discusses engineering costs, defining cost as the cash required to produce a product or service. It categorizes costs into fixed, variable, direct, and indirect, and explains their implications in manufacturing and non-manufacturing contexts. Additionally, it introduces concepts like marginal cost, standard cost, controllable cost, sunk cost, and opportunity cost as essential tools for decision-making in engineering economy.

Uploaded by

alyhaider54321
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ENGINEERING COSTS

CONCEPTS
AND
COST ESTIMATING MODELS
Engineering Economy, William G. Sullivan, Elin M. Wicks, C. Patrick
Koelling; Chapter 2 & 3
Engineering Economic Analysis, Donald G. Newnan, Ted G.
Eschenbach, Jermo P. Lavelle; Chapter 2
What is COST? - All expense are costs
COST is an amount of cash that has to be
paid in order to get something.
In production, a cost is amount of cash
that has been used to produce a product.
In business, cost is usually a monetary value of:
effort, material and resources,
time and utilities consumed, risks incurred
opportunity forgone and
delivery of a product or service. 2
Cost Object
(Product/Process/Service)

Cost Behavior Cost Traceability


(costs change when there (cause-and-effect relationship
is a change in output level) with a cost object)
Fixed cost Variable cost
Direct Indirect cost
Recurring Nonrecurring cost (overheads)
cost cost
3
FIXED COST: is independent of output
level. It changes when capacity change.
Like set up cost.
Recurring Fixed cost is – repetitive - like
administrative level salaries
Non-recurring Fixed cost is – non
repetitive – like plant construction cost

VARIABLE COST: is dependent on


output level – like raw material cost

4
INDIRECT COST
DIRECT COST
(OVERHEADS)
can trace at per unit
cannot trace at per unit
level – like raw material
level – like supervisor
cost
cost
5
Manufacturing Industry
Cost Object
(Product/Process/Service)

Manufacturing Cost Non-Manufacturing


overhead Cost

Direct Manufacturing
Direct overheads Selling and
material worker Distribution
Administrative

6
Factory building Factory indirect material
rent Like: grease, oil etc

Factory
electricity Manufacturing
cost Overheads

Repair and Factory indirect worker


maintenance of
production machinery like storekeeper and
and equipment supervisor salary
7
Warehouse
cost

Distribution
Legal
Cost Expense
Non-
Administration Transportation Manufacturing
overheads Administrative
Cost

Selling
Office
Administrative
cost Salaries Maintenance
and of
promotions office
Salaries of sales staff Office
staff
Sales Utilities
administration
8
Classify the following costs as either:
M: manufacturing (DM: direct materials, DW: direct
Worker, MOH: manufacturing overhead) or
N: non-manufacturing (SE: selling expense, GE:
general expense).

1. Factory supplies
2. Salary of production supervisor
3. Legal expense
4. Freight-out (transportation expense)
9
5. Marketing samples
6. Glue used in production Answers:
(1) M-MOH;
7. Wood in producing furniture (2) M-MOH;
(3) N-GE;
8. Salary of the company president (4) N-SE;
(5) N-SE;
9. Advertising (6) M-MOH;
(7) M-DM;
10. Administrative office rent (8) N-GE;
(9) N-SE;
11. Wages of factory worker (10) N-GE;
(11) M-DW;

10
Manufacturing Cost = Direct Materials Cost + Direct
worker Cost + Manufacturing over heads

Conversion Cost = Direct worker Cost +


Manufacturing Overhead cost

Prime Cost = Sum of all Directs =


Direct Material Cost + Direct worker Cost

Total Cost = Fixed Cost + Total Variable Cost

11
Cost as Decision Making Tools

Marginal Cost: is the variable cost for one


additional unit (per unit cost). It used to decide
whether additional unit(s) should be made or not.

Standard Cost or Average Cost: Cost per unit of


output that established in advance of actual
production or service delivery. It uses to estimate
operating performance.
12
Controllable Cost: Cost which can be influenced
by management decisions and actions. Most
variable costs are considered as controllable cost,
but most fixed costs are not controllable.

Sunk Cost: Cost that has already been incurred


and that cannot be changed by any decision made
now or in future. Example: Cost of failed
advertisement campaign.
Opportunity Cost: is associated with using a
resource in one activity instead of another.
13

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