Analysis of Cost: Dr. Ashok Panigrahi
Analysis of Cost: Dr. Ashok Panigrahi
Analysis of Cost: Dr. Ashok Panigrahi
Direct labor
Direct costs
Direct materials
Whether the cost
can be directly
allocated to a Managing
given product directors salary
Rent rates
Assigning Costs to Cost Objects
Fixed costs
Variable costs
Mixed costs
Stepped costs
Cost Classifications for
Predicting Cost Behavior
Behavior of Cost (within the relevant range)
Cost In Total Per Unit
Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Average fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Types of cost behaviour
Cost Concepts (Short-run)
1. Total Fixed Cost (TFC)
2. Total Variable Cost (TVC)
3. Total Cost (TC=TVC+TFC)
4. Average Fixed Cost (AFC=TFC/Q)
5. Average Variable Cost (AVC=TVC/Q)
6. Average Total Cost (AC=AFC+AVC)
7. Marginal Cost (MC= AVC/Q
Total Fixed Cost
Committed Discretionary
Long-term, cannot be May be altered in the short-
significantly reduced term by current managerial
decisions
in the short term.
Examples Examples
Depreciation on Advertising and
Equipment and Research and
Real Estate Taxes Development
Fixed Costs
Definition: The costs
of providing a
companys basic
operating capacity
Cost behavior: Remain
constant over the
relevant range
Fixed Costs - Example
Suppose Philips Company produces radios for which it
pays $10,000 per month as rent.
The total fixed costs i.e. rent of the building remain
constant at all levels of activity - $10,000 per month
On a per unit basis, the cost of rent decreases as
activity increases and vice versa
At 2,000 radios, the unit cost is $5
($10,000 2,000 units)
At 10,000 radios, the unit cost is $1
($10,000 10,000 units)
Fixed Costs Graphs
Total Variable Cost
Total variable cost (TVC) refers to the cost
that changes as the quantity of output produced
is changed.
Examples - purchases of raw materials, payments to
workers, fuel and power costs.
Total variable cost increases as the amount of output
increases.
If no output is produced, then total variable cost is zero;
the larger the output, the greater the total variable cost.
Variable Costs
Definition: Costs that
vary depending on the
level of production or
sales
Cost behavior: Increase
or decrease
proportionally
according to the level
of volume
Variable Costs - Example
Suppose Philips Company decided to manufacture radios
that contain a digital clock costing $10 per clock.
TC=TFC+TVC