Documents

Telecom engineer content (economics)_santosh sir.docx

Description
Elements of Cost Following are the three broad elements of cost: 1. Material The substance from which a product is made is known as material. It may be in a raw or a manufactured state. 2. Labour For conversion of materials into finished goods, human effort is needed and such human effort is called labour. Cost of unskilled as well as skilled labor employed in construction or production process fall into this category. 3. Expenses These include cost of special design, drawing or la
Categories
Published
of 18
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Related Documents
Share
Transcript
  Elements of Cost Following are the three broad elements of cost: 1.   Material The substance from which a product is made is known as material. It may be in a raw or a manufactured state. 2.   Labour For conversion of materials into finished goods, human effort is needed and such human effort is called labour. Cost of unskilled as well as skilled labor employed in construction or production  process fall into this category. 3.   Expenses These include cost of special design, drawing or layout, cost of purchase or hire of tools and  plants for a particular job and maintenance of such tools and equipment etc. Classification of Cost Total cost is generally classified into prime cost and overhead cost. The total expenditure consisting of material, labor and other expenses can be further analyzed as under: Material Cost = + Wages(Labour) Cost = + Expenses = Direct Material + Indirect Material + + Direct Labor + Indirect Labour + + Direct Expenses + Indirect Expenses Total Cost Prime cost + Overhead Cost From the above it will be clear that prime cost is aggregate of direct material cost, direct wages (labour) costs and direct expenses. Overhead cost is the aggregate of indirect material cost indirect wages (labour) and indirect expenses. Total cost is the aggregate of prime cost and overhead cost.  Prime cost:  Prime costs are those that can be reasonably measured and allocated to specific output or work activity. Overhead Cost:  Overhead costs are those that occur but cannot be reasonably measured and allocated to a specific output or activity. Component of prime cost (a)   Direct Material Cost  The material which becomes an integral part of a finished product and which can be conveniently assigned to specific physical unit is termed as direct material. Following are some of the examples of direct material:    All material or components specifically purchased, produced or requisitioned from stores    Primary packing material (e.g., carton, wrapping, cardboard, boxes etc.)    Materials passing from one operation or process to another. (b)   Direct Wages (Labour) Cost Wages which can be identified with and allocated to cost centers and cost unit. Payments of the following groups of labour fall within the definition of direct wages.    Labours engaged in altering the conditions, conformation and composition of the product.    Inspectors, analysts etc specifically required for such production.    If specifically identified, the wages of foreman, shop clerks, wages of internal transport  personnel. (c)   Direct Expenses  These are the expenses that can be directly, conveniently and wholly allocated to specific cost centers or cost units. Examples of such expenses are as follows:    Hire of some special machinery, tools and equipments for a particular job.    Maintenance cost of such tools and equipments.    Cost of special designs, drawings and layout. Component of overhead cost Overhead costs may be of four types  –   production overhead, administrative overhead, selling overhead and distribution overhead. (a)   Indirect Material The material which is used for purposes ancillary to the business and which cannot be conveniently assigned to specific physical units is termed as indirect material. Consumable stores, oil and waste, printing and stationery material etc. are some of the examples of indirect material. Indirect material may be used in the factory, office or the selling and distribution divisions. (b)   Indirect labour The labour employed for the purpose of carrying out tasks incidental to goods produced or services provided, is indirect labor. Such labour does not alter the construction, composition or condition of the product. It cannot be practically traced to specific units of output. Wages of storekeepers, foremen, directors’ fees, salaries of salesmen etc, are examples of i ndirect labour costs. Indirect labour may relate to the factory, the office or the selling and distribution divisions.  (c)   Indirect Expenses These are the expenses that cannot be directly, conveniently and wholly allocated to cost centers or cost units. Examples of such expenses are rent, lighting, insurance charges etc Sunk Cost Sunk cost is a cost, already paid, that is not relevant to the decision concerning the future that is  being made. Capital already invested that for some reason cannot be retrieved. Suppose that Mr. Pramod finds a motorcycle he likes and pays Rs 20,000 as a down payment, which will be applied to the Rs 1, 00,000 purchase price but which must be forfeited if he decides not to take the cycle. Over the weekend, Pramod finds another motorcycle he considers equally desirable for a purchase price of Rs 75,000. As pramod will purchase new motorcycle for Rs. 75,000, the Rs 20,000 is a sunk cost and thus would not enter into the decision except that it lowers the remaining cost of the first cycle. Life Cycle Cost Life cycle cost is commonly applied to alternatives with cost estimated over the entire system life span. This means that costs from the very early stage of the project (needs assessment) through the final stage (phase-out) are estimated. Typical application of life cycle costs is  buildings (new construction or purchases), manufacturing plants, commercial aircraft, new automobile models, etc. Opportunity cost The value of benefits sacrificed in selecting a course of action among alternatives. The value of the next best opportunity foregone by deciding to do one thing rather than another. For example, if a building is proposed to be utilized for housing a new project plant, the likely revenue which the building could fetch, if rented out, is the opportunity cost which should be taken into account while evaluating the profitability of the project. Simple Interest:  It uses fixed percentage of the principal (the amount of money borrowed) i.e. if the total amount of interest earned is directly proportional to the initial principal amount, then the interest is said to be simple. For a deposit of P dollars at a simple interest rate of i for N periods, the total earned interest  I   would be     I = (i*P) N The total amount available at the end of N periods, F, thus would be F = P+I = P (1+iN) Compound interest:  When the total time period is subdivided into several interest periods (one year, half yearly, quarterly, monthly, weekly); interest is credited at the end of each interest  period, and is allowed to accumulate from one interest period to next, then the interest is said to compounded. Derivation of compound interest formula (single cash flow)    (To find the single future sum (F) of the initial payment P) During a given interest period, the current interest is determined as a percentage of the total amount owed (i.e. principal plus the previous accumulated interest) For the 1st interest period, Interest I 1 = i*P Total accumulated amount at the end of 1st year F 1 = P + I 1  = P + i*P = P (1+i) For the 2nd interest period Interest I 2 = i* F 1  = i* (1+i) P Fig: 3.1Single cash flow diagram Total accumulated amount at the end of 2nd year F 2  = F 1 + I 2  = P (1+i) + i * (1+i) P = P (1+i) 2  For the 3rd interest period I 3 = F 2  * i = P (1+i) 2  * i Total accumulated amount at the end of 2nd year F 3  = F 2 + I 3  = P (1+i) 2 +P (1+i) 2  * i = P (1+i) 3  Continuing, If there is ‘  N ’ interest period The factor in the bracket is called the  Single Payment Compound Factor   Functionally,   (/,%,)   (To find the initial payment (P) of the single future sum (F)  ) The factor in the bracket is called the  Single Payment Present worth factor   Functionally,  =  (/,%,)   Nominal and Effective interest rate If a financial institution uses a unit of time other than a year  –   a month or a quarter (e.g. when calculating interest payments), the institution usually quotes the interest rate on an annual basis. Commonly this rate is stated as r% Compounded M-ly   Where, r = the nominal interest rate per year M = the compounding frequency or the number of interest periods per year r/M = the interest rate per compounding period. Suppose that if a bank express the interest rate as “18% compounded monthly”, we say that 18% is the nominal interest rate or annual percentage rate (APR)  and the compounding frequency is monthly i.e. number of interest period per year is 12. A nominal interest rate r   may be stated for any time period  –   1 year, 6 months, quarter, month, week day etc. Let us see the following examples for expressing the nominal interest rate. r   = 12% compounded semiannually, M=2, i.e.12%/2 (6% per 6 months) r = 12% compounded quarterly, M=4, i.e. 12%/4 (3% per quarter) r = 18% compounded monthly, M=12, i.e. 18%/12 (1.5% per month) N 0 P F i % F= P (1+i) N  P= F 1+i -   N  
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks
SAVE OUR EARTH

We need your sign to support Project to invent "SMART AND CONTROLLABLE REFLECTIVE BALLOONS" to cover the Sun and Save Our Earth.

More details...

Sign Now!

We are very appreciated for your Prompt Action!

x