All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Engineering Economy Chapter 2: Fundamental Cost Concepts
Page 42 Sullivan Books Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Cost Terminology There are a variety of cost to be considered in an engineering economic analysis.
These cost differ in their frequency of occurrence, relative magnitude, and degree of impact on the study.
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Costs can be categorized in several different ways. Fixed cost: unaffected by changes in activity level over a feasible range of operations for capacity or capability available. Typical fixed costs include insurance and taxes and interest costs on borrowed capital.
Variable cost: those associated with an operation that varies in total with the quantity of output or other measure of activity level. For example the costs of material and labor used in a product or service are variable costs, because they vary total with the number of output units.
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Total cost: an incremental cost (or incremental revenue) is the total of cost resulting from fixed cost & variable cost.
TC = VC + FC = aQ + FC , where, Q= output , avariable number Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Example 1
Classify each of the following cost items as mostly fixed or variable.
Raw materials administrative salaries Direct labor insurance Depreciation office rent Supplies Utilities Property taxes Interest borrowed money
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Fixed cost: unaffected by changes in activity level.
Variable cost: vary in total with the quantity of output (or similar measure of activity)
Incremental cost: additional cost resulting from increasing output of a system by one (or more) units Example 1 : Buku Sulivian pg44 Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Solution Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Buku Rosnah Mohamad Sirin pg3-6 Example 2 :
Untuk membancuh 1m 3 konkrit memerlukan kos berubah sebanyak RM5, dan kos tetap sehari ialah RM100.
(a) Terbitkan persamaan linear kos pengeluaran konkrit.
(b) Kira kos pengeluaran bagi 1000 m 3 konkrit yang dibancuh dalam sehari.
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Buku Rosnah Mohamad Sirin pg3-6 Solution a) F=100 sehari, kos berubah = 5 m 3 sehari, katakan keluaran konkrit ialah Q m 3
sehari, maka kos berubah iala 5Q
TC=F+aQ TC=100+5Q
b) Jumlah pengeluaran 1000 m 3 konkrit sehari
TC=100+5(1000) TC=RM5100
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Buku Rosnah Mohamad Sirin pg3-6 Example 3:
Kos mengeluarkan 10 helai kemeja ialah RM350, manakala sebanyak RM600 diperlukan untuk mengeluarkan 20 helai kemeja.
(a) Terbitkan persamaan linear kos pengeluaran kemeja. (b) Jika pengeluaran meningkat kepada 100 helai kemeja pada bulan hadapan, berapakah jumlah pengeluaran bagi bulan hadapan.
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Buku Rosnah Mohamad Sirin pg3-6 Solution:
250=a(10) a=25 Gantikan a ke dalam persamaan (1), 350=F+25(10) F=100 Persamaan kos ialah TC = 100+25Q
(b) TC = 100 + 25(100) = RM2600 Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling More ways to categorize costs Direct: can be measured and allocated to a specific work activity (cth : Kos buruh & kos bahan adalah kos langsung bagi sesebuah pembinaan bangunan dlm kejuruteraan awam)
Indirect: difficult to attribute or allocate to a specific output or work activity (also overhead or burden) (cth : Kos baik pulih mesin / jentera yg rosak perlu ditanggung oleh syarikat)
Standard cost: are planned cost per unit of output, established in advance of production or service delivery (cth :BQ mempunyai jumlah harga bagi setiap item kerja yang merupakan cost control dalam kos standard)
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Standard costs play an important role in cost control and other management functions,
i. Estimating future manufacturing costs.
ii. Measuring operating performance by comparing actual cost per unit with the standard unit cost. S-curve showed for site progress (actual vs progress) Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling We need to use common cost terminology. Cash cost: a cost that involves a payment of cash..cash voucher Not involve cash transaction in the accounting system, must prepare cash voucher Example 1: payment receive by hand (deposit to buy something , salaries, bonus, cash & carry etc)
Book cost: a cost that does not involve a cash payment..payment voucher Receive payment through company account , must prepare payment voucher . Example 1 : payment receive by cheque ( progress payment of project) Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Sunk cost: a cost that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action. kos rugi yang telah dikeluarkan sebelum ini dan hangus begitu shj.
Example 1 pg 46: Joe College finds a motorcycle he likes and pays $40 as a down payment, which will be applied to the $1,300 purchase price, but which must be forfeited if he decides not to take the cycle. Over the weekend, Joe finds another motorcycle he considers equally desirable for a purchase price of $1,230. for the purpose of deciding which cycle to purchase, the $40 is a sunk cost and thus would not enter into the decision, except that it lowers the remaining cost of the first cycle. The decision then is between paying an additional $1,260 ($1,300 - $40) for the first motorcycle versus $1,230 for the second motorcycle.
Example 2 : tender of project by government..RM? Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Opportunity cost: the monetary advantage foregone due to limited resources. The cost of the best rejected opportunity. kos peluang yang dapat ditepikan / ditolak secara tersirat Example 1 pg 47: Consider a student who could earn S20,000 for working during a year, but choose instead to go to school for a year and spend S5,000 to do so. The opportunity cost of going to school for that year is S25,000 ( S5,000 cash outlay and S20,000 for income foregone .This figure neglects the influence of income taxes and assumes that the student has no earning capability while in school.
Example 2: Company must pay for income tax for every year. Cost for reduce tax ex: entertains client, bonus for staff etc.
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Life-cycle cost: the summation of all costs related to a product, structure, system, or service during its life span.
2 Phase : Acquisition Phase & Operation Phase Acquisition Phase Need or wants, prelim design, detailed design. Operation Phase Construction, O & M, Disposal Potential for life cycle cost savings - how much total cost budget to use from start until finish the project. Cumulative life cycle cost cumulative all cost for the project based on scheduled Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Life-cycle cost Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Several basic life-cycle cost categories Investment cost capital investment required for most activities in the acquisition phase. (kos pelaburan tidak berulang, berlaku sekali sahaja cth kos beli aset tetap spt pejabat, machine dll)
Working capital funds required for current assets (equipment, facilities etc) that need to set up and support of operational activities. (kos yang dikeluarkan utk sepanjang operasi construction sehingga siap)
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
Operation & Maintenance (O&M)- expense items in operation phase. (kos operasi & senggaraan-berulang sepanjang operasi)
Disposal cost- nonrecurring cost of shutting down or handover the operation at the end of life cycle. (kos pelupusan - kos tidak berulang berlaku hanya sekali shj cth tred in machine) Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Rosnah Mohamad Sirin
Exercise Chapter 2:
1. Kos total membaiki dua buah stor ialah RM1160. Manakala bagi 10 buah stor, kos meningkat kpd RM1800. (a) Terbitkan persamaan kos linear membaiki stor. (b) Berapakah kos tetap dan kos berubah membaiki 5 buah stor.
2. Sebuah syarikat dikenakan bayaran RM70 untuk memindahkan sebuah mesin pada jarak 15km. Manakala RM100 dikenakan jika jarak meningkat kepada 25km. (a) Terbitkan persamaan kos linear bagi memindahkan mesin tersebut. (b) Berapakah kos minimum untuk memindahkan mesin ini? (c) Berapakah kadar bayaran per km, memindahkan mesin? Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Buku Sullivan 3. The fixed and variable costs for the three manufacturing plant sites for a product are shown in the following table: Site Fixed Cost Variable Cost per Year per Unit A RM500 RM10 B RM1,000 RM8 C RM1,500 RM6 (a). Write the linear equation for Site A, B and C. (b). If the production for next year is expected to achieve 500 units, which site will get the highest total cost?
4. (a) Sketch and describe the life cycle cost concept. (b) If your company decided to buy a new compactor machine that life 6 years, with relevant examples explain the meaning of investment cost, operation and maintenance cost and also disposal cost.
Copyright 2012 by Pearson Education, Inc. Upper Saddle River, New Jersey 07458 All rights reserved. Engineering Economy, Fifteenth Edition By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling