cost analysis and estimation ppt.pptx
TRANSCRIPT
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
1/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
2/31
What is Cost?
Cost is the monetary value that a company has spent in
order to produce something.
Sellers point of viewBuyers point of view
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
3/31
What Makes Cost Analysis Difficult?
Link Between Accounting and Economic Valuations Accounting and economic costs often differ.
Historical Cost
When costs are calculated for a firms income tax returns, the law requires
use of the actual amount spent to purchase the labor, raw materials, and
capital equipment used in production.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
4/31
Current cost is the amount that must be paid under prevailing market
conditions. Current cost is influenced by market conditions measured by the
number of buyers and sellers, the present state of technology, inflation, and
so on.
Current cost
Replacement CostReplacement cost, the cost of duplicating productive capability using current
technology.For example, the value of used personal computers tends to fall by 30 to 40
percent per year.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
5/31
Opportunity Cost
Opportunity Cost ConceptOpportunity cost is foregone value.
Reflects second-best use.
Explicit and Implicit CostsExplicit costs are cash expenses.
Implicit costs are noncash expenses.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
6/31
Incremental and Sunk Costs in Decision Analysis
Incremental Cost Incremental cost is the change in cost tied to amanagerial decision.
Incremental cost can involve multiple units ofoutput.
Marginal cost involves a single unit of output.
Sunk Cost Irreversible expenses incurred previously.
Sunk costs are irrelevant to present decisions.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
7/31
Short-run and Long-run Costs
How Is the Operating Period Defined?At least one input is fixed in the short run.
All inputs are variable in the long run.
Two basic cost functions are used in managerial
decision making: short-run cost functions, used for day-to-
day operating decisions, and long-run cost functions, used
for long-range planning.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
8/31
Fixed and Variable CostsFixed costs do not vary with output. These costs include interest
expenses, rent on leased plant and equipment, depreciation charges
associated with the passage of time, property taxes, and salaries for
employees not laid off during periods of reduced activity.
Variable costs fluctuate with output. Expenses for raw materials,
depreciation associated with the use of equipment, the variable
portion of utility charges, some labor costs, and sales commissions
are all examples of variable expenses.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
9/31
Short-run Cost CurvesShort-run Cost Categories
Short-run Cost RelationsShort-run cost curves show minimum cost in
a given production environment
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
10/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
11/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
12/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
13/31
Long-run Cost Curves
Economies of Scale
Long-run cost curves show minimum cost inan ideal environment. Labor specializationoften gives rise to economies of scale. Laborproductivity can be higher in large firms,
where individuals are hired to performspecific tasks. This can reduce unit costs forlarge-scale operations.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
14/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
15/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
16/31
Cost Elasticity and Economies of Scale
Cost elasticity is C= C/C Q/Q.
C < 1 means falling AC, increasing returns.
C = 1 means constant AC constant returns.
C> 1 means rising AC, decreasing returns.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
17/31
Short-run cost curves relate costs and output for a specific
scale of plant. Long-run cost curves identify the optimal scale
of plant for each production level. Long-run average cost
(LRAC) curves can be thought of as an envelope of short-run
average cost (SRAC) curves.
Long-Run Average Costs
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
18/31
Long-run Average Costs
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
19/31
Minimum Efficient Scale
Competitive Implications of MinimumEfficient Scale
MES is the minimum point on the LRAC curve.
Competition is most vigorous when:
MES is small in absolute terms.
MES is a small share of industry output.
Disadvantage to less than MES scale is modest.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
20/31
Transportation Costs and MES
Terminal, line-haul and inventory costs can
be important.
High transport costs reduce MES impact.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
21/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
22/31
Firm Size and Plant Size
Multi-plant Economies andDiseconomies of Scale
Multi-plant economies are cost advantages from operating
several plants.
Multi-plant diseconomies are cost disadvantages from
operating several plants.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
23/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
24/31
Economics of Multi-plant Operation: anExample
Plant Size and Flexibility
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
25/31
Learning CurvesLearning Curve Concept
Learning causes an inward shift in the LRAC curve.
Learning curve advantages are often mistaken for
economies of scale effects.Learning Curve Example
Strategic Implications of the Learning CurveConcept
When learning results in 20% to 30% costsavings, it becomes a key part of competitivestrategy.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
26/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
27/31
Economies of Scope
Economies of Scope Concept Scope economies are cost advantages that stem from producing
multiple outputs.
Big scope economies explain the popularity of multi-product firms.
Without scope economies, firms specialize.
Exploiting Scope Economies
Scope economics often shape competitive strategy for new
products.
C t l fit A l i
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
28/31
Cost-volume-profit AnalysisCost-volume-profit Charts
Cost-volume-profit analysis shows effects of varying scale.
Breakeven analysis shows zero profit points of cost coverage.
D f O i L
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
29/31
Degree of Operating Leverage DOL=Q(P-AVC)/[Q(P-AVC)-TFC]
DOL is the elasticity of profit with respect to output.
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
30/31
-
8/14/2019 Cost Analysis and Estimation PPT.pptx
31/31