Cost and cost concepts (Engineering Economics and Management)

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1. Presentation On Sub: COST AND COST CONCEPT EEM 3 nd Sem Computer ( 2016-17) Prepared By: Name: Shail M. Nakum Enr. No: 150410107054 Class: S.Y .: Computer Div.-I

2. COST Cost is the prize paid by the user of the scare economic resources to the supplier of the resources. Cost concept is used for analyzing the cost of a project in short and long run.

3. TYPES OF COST 1) On the basis of service period : i ) Short-run cost ii) Long-run cost 2)On the basis of cost behaviour to production volume: i ) Fixed cost ii) Variable cost

4. 3) On the basis of changes in total costs in relation to certain specified volume : I) Total cost ii) Average cost iii) Marginal cost 4) Some other important classification of costs: I) Opportunity cost ii) Implicit cost Iii) Sunk cost

5. SHORT-RUN COST Short-run costs have a short-term service period, usually upto one year. Costs incurred on materials, operating expenses like cost of labour and utilities like power, water they are known as short-term cost.

6. LONG-RUN COST The long-run costs are those cost whose benefits period extend fir several future years. Purchase of fixed assets like land, building, machines, furniture, vehicles etc. Cost incurred on research and development and training to employees are treated as long-term cost.

7. FIXED COST Fixed cost remain fixed as per unit of time rather than volume of production. Thus, such cost remain fixed irrespective of volume of production as shown in graph. Examples : Interest Rate, Rent, Salary, Depreciation on machines.

8. VARIABLE COST The variable cost are those costs which vary with the volume of production. It is generally directly or proportionality related to the volume of production as shown in graph. Examples : Cost of direct materials, Direct labour, Direct expenses like power consumption by machines.

9. TOTAL COST The total cost is the sum of total fixed costs and total variable costs. TOTAL = TOTAL + TOTAL COST FIXED COST VARIABLE COST

10. AVERAGE COST The average cost indicates the per unit cost at different level of production activities. Because of the fixed element of the TFC, the average cost per unit decreases as the production increases.

11. MARGINAL COST The marginal cost is defined as the change in total costs with one unit increase or decrease in the current quantity produced.

12. OPPORTUNITY AND SUNK COST Opportunity cost is the cost of the next best alternative sacrificed. The opportunity cost is also called alternative cost. Sunk cost are such cash outflows incurred currently which can not be reversed at later stage.

13. IMPLICIT AND EXPLICIT COST The explicit cost is certain and fixed E.g.. 10% interest on bond. The implicit cost are also consider in terms of incidental events or cost of inconvenience.

14. BREAK EVEN POINT It is a situation where there is a no profit and no losses. Revenue = Expenses

15. BREAK EVEN ANALYSIS Break even analysis is based on the cost behaviour pattern to the level of production. It is a key consideration in the pricing decisions of any businesses.

16. USES OF B.E.A To continue or To shut down the plan : Contribution positive  To continue Contribution negative  To be indifferent Contribution equal  To shut down To make or buy a component : Outside price > Variable cost - To make Outside price = Variable cost - To be indifferent Outside price < Variable cost - To buy

17. 3) Price discrimination : To coat price for specific job. Break even analysis can be explained in two forms. Algebraic Graphical

18. ALGEBRIC REPRESENTATION

19. GRAPHICAL REPRESENTATION

20. ASSUMPTION AND LIMITATION OF B.E.A All the cost are differentiable between fixed cost and variable cost. The selling price per unit is independent of volume of sales. Variable cost per unit is independent of volume of production. Total fixed cost remain fixed with the relevant range of capacity utilization.

21. GM MOTORS A classic example of break even success and sustenance.

22. Turnover of in its first full year of operation. ( First few years) The company has a turnover of $37,084 Mil sept 2016.  Number of employees in year 2015 was 216,000 . Information about GM Motors

23. They owned: Buick, GMC, Chevy, Pontiac, Saturn, Cadillac, Opel, Hummer, Holden, Saab, Vauxhall. they are shareholders in: Daewoo, Suzuki, Isuzu They are in Joint ventures with: Autovaz (lada ), SAIC they are in Hybrid partnerships with: Toyota, Daimler, Chrysler They Do engines for : Fiat and Honda They do manufacturing for: Renault

24. Early days : Founded September 16, 1908; 108 years ago (as General Motors Corporation)August 11, 2009 (as General Motors Company ) Founder : William C. Durant, Charles Stewart Mott Frederic L. Smith The  GM Renaissance Center in Detroit, Michigan. Chose the method of franchisee model like Buick and other automobile companies with networking and stringent quality control.

25. Cost incurred Fixed cost Electricity = 50,000 pm Salaries = 30,000 pm ( cook and attendant ) Machinery = 4,00,000 ( one time cost ) Variable cost Production and raw materials = 5,00,000 pm Other items = 10,000 pm ( assembly line maintenance cost etc.) Selling price Ranging from US$10,000 to US$100,000+

26. Current situation Average demand General Motors (NYSE: GM) sold 208,290 vehicles in October to individual or “retail” customers in the U.S. Average revenue 152.4 billion USD (2015) Projected break even point 10 million and 11 million annual units — a (huge) decline of 8 million vehicles compared to the estimated 17.7 million units forecast to be sold this year. Number of employees in year 2015 was 216,000 .

27. Strategies applied Marketing Strategy plays one of the most important role to achieve company goals and objectives. general Motor is one of the best automobile company in the word. General Motors manufacturing the cars and trucks in the international market. General Motors segmentation strategy is main aim to target the different groups. In this GM think that the whole market is single market General Motors design the car with the different range of cost and it design it’s strategy according to the Income, Age, Family, occupation.