Transcript Cost Analysis - Universitas Trunojoyo Madura

Cost Analysis
Mohammad Arief
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Overview
Economic
Scale
Operations
Activity.
COST
Competitors arise that
produce at lower costs
Firms that are
satisfied with
the status quo.
Drive them out of business
The advantages of a large firm have NOT
provided the advantages of flexibility and
agility found in some smaller companies
Opportunity
Cost Concept
Cost analysis is helpful in the task of
finding lower cost methods to produce
goods and services
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Attracting a resource
from its best alternative
Managers seek to produce
the highest quality products
at the lowest possible cost.
Meaning and Measurement of Costs
In elementary form
COST
Refers to the exchange or
transformation of resources takes place.
Opportunity
Economics cost
Cost Information
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Accounting vs Economic Cost
 Accounting costs involve explicit historical costs. They
attempt to use the same rules for different firms, so we can
compare firm performance.
 Economic costs are based on making decisions. These costs
can be both implicit and explicit.
 A chief example is that economic costs include the opportunity costs of
owner-supplied resources such as time and money, which are implicit
costs.
 Economic Profit = the difference between total revenues and
these total economic costs, implicit opportunity costs as well as
explicit outlays.
Total Revenues - Explicit Costs - Implicit Costs
 Both explicit and implicit costs make economic profit lower than
accounting profit
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Contrasts between Accounting
and Economic Costs
 Depreciation Cost Measurement.
Accounting depreciation (e.g., straight-line depreciation) tends to have little
relationship to the actual loss of value
 To an economist, the actual loss of value is the true cost of using machinery
 Inventory Valuation.
Accounting valuation depends on its acquisition cost
 Economists view the cost of inventory as the cost of replacement
 Unutilized Facilities.
Empty space may appear to have "no cost”
 Economists view its alternative use (e.g., rental value) as its opportunity cost
 Sunk Costs.
Already paid for, or there already exists a contractual obligation to
pay
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SHORT-RUN COST FUNCTIONS
To measuring the costs of producing a given quantity of output,
economists are also concerned with determining the behavior of
costs when output is varied over a range of possible values.
Cost
Function
Fixed Cost
TC = FC + VC
The costs of all the inputs to the
production process that are fixed or
constant over the short run
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Variable Cost
Consist of the costs of all the
variable inputs to the production
process
Short-Run Cost Graphs
MC
ATC
3.
1.
AFC
AFC
Q
Q
2.
AVC
Q
AVC
MC intersects lowest point
of AVC and lowest point of
ATC.
When MC < AVC, AVC declines
When MC > AVC, AVC rises
Relationships Among Cost & Production Functions
When Factor Markets Are Perfectly Competitive
Q
 AP & AVC are inversely
prod. functions
related. (ex: one input)
 AVC = WL /Q = W/ (Q/L) =
W/ APL
AP
 As APL rises, AVC falls
 MP and MC are inversely
related
 MC = dTC/dQ = W dL/dQ = W /
(dQ/dL) = W / MPL
 As MPL declines, MC rises
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MPL
L
cost
AVC
MC
cost functions
Q
LONG-RUN COST FUNCTIONS
Over the long-run planning horizon, using the available production
methods and technology, the firm can choose the plant size, types and
sizes of equipment, labor skills, and raw materials that, when combined,
yield the lowest cost of producing the desired amount of output.
Optimal Capacity Utilization
Optimal output for a
given plant size
Short-run concept of
capacity utilization
Optimal plant size for
a given output rate
Reduced average total
cost of any given output
Optimal plant size
Will further opportunities
for cost reduction cease
ECONOMIES AND DISECONOMIES OF
SCALE
Economic
Scale
Refer the condition whereas the
proportionally output more faster than input.
Technology
Finance
Factors
● Operating Scales
increase
● Specialization
● Productive mechines
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A firm size increase
● Obligation offering
● Bank loan
● Bigger transaction
(buying or selling the
product)
Product-level
economies
Firm-level
economies
Economic
Scale
Plant-level
economies
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Which include specialization
and learning curve effects
Such as economies in
overhead, required reserves,
investment, or interactions
among products (economies of
scope).
Which are economies in
distribution and
transportation of a
geographically dispersed
firm, marketing, sales
promotion, or R&D of
multi-product firms
Diseconomic
Scale
Rising long-run average costs at higher rates
of throughput are attributed.
Factors
● Individual production plant is
transportation costs
● Labor requirements
● Higher wage rates
● Relocation programs may be
required to attract the necessary
personnel
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Large-scale plants are often inflexible operations designed
for long production runs of one product, based often on
forecasts of what the target market wanted in the past