Cost Concepts

Engr. Mark Benz Pineda

Cost

-Amount or equivalent paid or charged for

something.
FIXED COST

-Costs that do not change no matter what the

circumstance is.

Examples:
DEBT
HOUSE RENTAL
VARIABLE COST

 -Coststhat changes in value depending on the

circumstance.

Example:
 WATER BILL
 ELECTRIC BILL
INCREMENTAL COST

 -Is
the total cost incurred due to an additional
unit of product being produced.
In connection with surfacing a new highway, a contractor has a choice of two sites on which to set up the asphalt-mixing plant
equipment. The contractor estimates that it will cost $2.75 per cubic yard mile  (yd^{3}-mile) to haul the asphalt-paving
material from the mixing plant to the job location. Factors relating to the two mixing sites are as follows (production costs at
each site are the same):

The job requires 50,000 cubic yards of mixed-asphalt-paving material. It is estimated that four months (17 weeks of five
working days per week) will be required for the job. Compare the two sites in terms of their fixed, variable, and total costs.
Assume that the cost of the return trip is negligible. Which is the better site? For the selected site, how many cubic yards of
paving material does the contractor have to deliver before starting to make a profit if paid $12 per cubic yard delivered to
the job location?
Solution:

The contractor will begin to make a profit at the point where total revenue equals total cost as
a function of the cubic yards of asphalt pavement mix delivered. Based on Site B,we have:

(3mi)($2.75/(yd^3-mile))=$8.25 in variable cost per yd³ delivered

Total cost=total revenue
$90,750+$8.25 x=$12 x
x=24,200 yd³ delivered.
DIRECT COST
are expenses tied to the production of goods or providing service.

Examples:
Raw materials, manufacturing supplies, machinery/equipment, and
direct labor
INDIRECT COST
 these are those costs which are not directly related to production.

Examples:
Insurance, safety and PPE, computers, project related software
OVERHEAD COST
Refer to those expenses associated with running a business that can’t be
linked to creating or producing a product or service.
Overhead costs do not directly result in a profit for the company.
But, they are necessary to support profit-making activities.

Examples:
administrative salaries, office supplies, property taxes, rent,
utilities
STANDARD COST
is described as a predetermined cost, an estimated future cost, an
expected cost, a budgeted unit cost, a forecast cost, or as the "should
be" cost.

Examples:
Expected number of production
SUNK COST
A sunk cost refers to money that has already been spent and
cannot be recovered
OPPORTUNITY COST
The potential benefits that an individual, investor, or business misses out
on when choosing one alternative over another.
LIFE CYCLE COST
is an approach that assesses the total cost of an asset over its life cycle
including initial capital costs, maintenance costs, operating costs and the
asset's residual value at the end of its life.
WHITE BOARD SESSION
Simple Interest