Chapter 2 Fundamental Cost Concepts

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
Engineering Economy
Chapter 2: Fundamental Cost
Concepts

Page 42 Sullivan Books
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.

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.

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
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

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
Solution
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.

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

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.

Solution:

(a) TC
1
=350, Q
1
=10
TC
2
=600, Q
2
=20

TC
1
=F+aQ
1
TC
2
=F+aQ
2
350=F+a(10)..(1) 600=F+a(20)(2)

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
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)

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)
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)
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?
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.

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
Life-cycle cost
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)


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)
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?
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.


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Copyright 2012 by Pearson Education, Inc.

Upper Saddle River, New Jersey 07458

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