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Lecture 11

ENGINEERING COSTS

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 Fixed Cost
• It is a constant quantity independent of output or activity.

• Time related.

• Increase or decrease in the number of goods or services produced

or sold do not affect fixed cost.

• Examples: Salaries/month, rent/month.

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 Variable Cost
• Depends on the output or activity level..

• It rises if production increases and falls if production decreases.

• Examples: Raw production cost for a production facility.

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 Total Cost
• Cost incurred in reaching out a particular level of output.

• Sum of fixed cost and variable cost.

• Total Cost = Fixed Cost + Variable Cost

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 Marginal Cost
• Variable cost associated with additional unit of output or activity.

• Marginal Cost = Total change in cost / Change in quantity

• Example: A direct labor marginal cost of $2.50 to produce one

additional production unit.

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 Average Cost
• Total cost of an output or activity divided by the total output or
activity in units.

• Example: Total direct cost of producing 400,000 units is $3.2

million. Calculate average cost.

• Average cost = $3.2 million / 400,000 = $8.00

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 Breakeven Point
• Output level at which the total revenue is equal to the total cost.

• No net profit or loss.

• BEP = FC / (SP-VC)

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 Sunk Cost
• It is a past cost that cannot be changed and is therefore irrelevant
in engineering economic decisions.

• It has already been incurred and cannot be recovered.

• Example: Rent being paid.

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 Opportunity Cost
• Cost or benefit missed by an individual while choosing one
alternative over another.

• This cost is associated with an opportunity which is declined.

• Example: A product distributor decides to construct a new

building. Leasing a building would have resulted in a $12,000
product distribution cost savings during next 6 months while new
warehouse is being constructed. By forgoing warehouse leasing
alternative, distributor experiences an opportunity cost of $12,000.

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 Recurring & Non Recurring Cost
• Recurring cost occurs at regular intervals and is anticipated.

• Example: Cost of providing electricity to facility.

• Non recurring occurs at irregular intervals and is generally not

anticipated.

• Example: Cost to replace a company vehicle damaged beyond

repair in an accident.

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 Incremental Cost
• It represents difference between some type of cost of for two
alternatives.

• It plays a significant role in engineering economic decision.

• Example: A and B are two alternatives. Initial cost for A is

$10,000 and initial cost of B is $12,000. Incremental initial cost is
$2000.

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Cash Cost:
• Cost transaction or cash flow.
• If a company purchases an asset, it releases cash cost.

Book Cost:
• Cost of an asset as recorded in company’s account books which
might be different than its real value.

Life Cycle Cost:

• Refers to costs that occur over the various phase of a product or
service life cycle, i.e need, assessment, design, production,
operation, decline, retirement.

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Salvage Value:
• Estimated value that an owner is being paid when an item is sold
at the end of its useful life.
• Estimated resale value.
• It is used to determine annual depreciation.

Depreciation Cost:
• A vehicle that depreciated over 5 years is purchased at a cost of
$17,000. Salvage value is $2000.
• Depreciation Cost: ($17000 - $2000) / 5 = $3000

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EE-232 Department of Electrical
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Power Engineering