CHAPTER
The Cost of
Production
7.1 Measuring Cost: Which Costs
Matter?
7
Economic Cost versus Accounting Cost
● accounting cost equipment. CHAPTER OUTLINE
7.1
Measuring Cost: Which Costs
Matter?
7.2
Costs in the Short Run
7.3
Costs in the Long Run
7.4
Long-Run versus Short-Run Cost
Curves
7.5
Production with Two Outputs—
Economies of Scope
7.6
Dynamic Changes in Costs—The
Learning Curve
7.7
Estimating and Predicting Cost
● economic cost
Actual expenses plus depreciation charges for capital
Cost to a firm of utilizing economic resources in production.
Opportunity Cost
● opportunity cost Cost associated with opportunities forgone when a firm’s resources are not put to
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Of course a prospective sunk cost is different and, as we mentioned earlier, would certainly affect the firm’s decisions looking forward.
How do we know which costs are fixed and which are variable?
Over a very short time horizon—say, a few months—most costs are fixed.
Over such a short period, a firm is usually obligated to pay for contracted shipments of materials.
Over a very long time horizon—say, ten years—nearly all costs are variable.
Workers and managers can be laid off (or employment can be reduced by attrition), and much of the machinery can be sold off or not replaced as it becomes obsolete and is scrapped.
Copyright © 2013 Pearson Education, Inc. • Microeconomics • Pindyck/Rubinfeld, 8e.
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Copyright © 2013 Pearson Education, Inc. • Microeconomics • Pindyck/Rubinfeld, 8e.
AMORTIZING SUNK COSTS
MARGINAL COST (MC)
● amortization Policy of treating a one-time expenditure as an annual cost spread out over some number of years.
● marginal cost (MC) extra unit of output.
Amortizing large capital expenditures and treating them as ongoing fixed costs can simplify the economic analysis of a firm’s operation. As we will see, for example, treating capital expenditures this way can make it easier to understand the tradeoff that a firm faces in its use of labor versus capital.
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Because fixed cost does not change as the firm’s level of output changes, marginal cost is equal to the increase in variable
According to Epstein and Buhovac, (2014), costing system is a process designed to monitor the costs incurred in a certain business. Costing systems are meant to advise the management on how to choose the most appropriate course of action with cost efficiency and capability. According to Cardinaels and Labro (2009) costing system provides detailed cost information needed by management needs to control current operations with the aim of improving the future. Below are some of the costing systems that are common to many organizations (Epstein & Buhovac, 2014).
According to The Environment Agency in the United Kingdom (2006), Environmental Accounting can be defined as:
16. The existence of both economies of scale and diseconomies of scale would have what effect on the LRAC curve?
“Financial accounting provides information used primarily by investors, creditors, and others outside a business; whereas, managerial accounting focuses on information used by executives, managers, and employees who work inside the business (Edmonds, Olds, & Tsay, 2008, p.4). In the Businessweek article, The Costco Way, there are examples of financial and managerial accounting for Costco. While they are similar in some of the information they use, there are more differences between the two. The article discusses Wall Street’s concern with Costco being able to maintain profit gain. However, Costco’s strategic plan of compensating their employees turns out to be working in their favor, as demonstrated by the “$34 billion in sales with lesser employees” (Holmes & Zellner, 2004). In my opinion, not only do the numbers demonstrate how motivating higher wages are, but the fact that they achieved this feat with lesser employees means those employees are much motivated to help reach the organizational goals. The annual operating profit mentioned in the article is an example of financial accounting. Financial information provided aids in investors making decisions of whether or not to invest or buy stock in a company based on historical trends of the company.
Kess, M. (1995). Cost accounting and cost analysis at the united states mint. The Government Accountants Journal, 44(2), 56. Retrieved from http://prx-herzing.lirn.net/login?url=http://search.proquest.com.prx-herzing.lirn.net/docview/222366904?accountid=167104
Overall Theme We will explore fundamental assumptions of cost functions and discuss the relationships between cost behaviour, cost estimation and cost prediction. The concept of cost driver analysis and its application to cost estimation and cost management will also be discussed. We will also describe how to estimate cost behaviour using managerial judgment, engineering methods and other quantitative techniques.
In the long run an organizations fixed costs must be covered in order for the company to continue to operate and continue to make profits. If these fixed costs fail to be covered, an organization will ultimately run out of money (and most likely go out of business). In utilities some costs are often ‘sunk’ costs. Sunk costs are defined as a cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunk costs are independent of any event that may occur in the future (Investopedia) and must not be confused with other costs. The latter (sunk costs) are not considered in price and output calculations; so it is important to determine the nature of a cost to ensure it is accounted for the relevant fixed costs in pricing decisions.
Maintenance is more time consuming on an employee to employee basis. Lack of uniformity and familiarity may increase costs as well as time
Would factory security and assembly activities be best classified at an appliance manufacturing plant as unit-level, batch-level, product-level, or organization-sustaining?
The board of directors of the Cortez Beach Yacht Club (CBYC) is developing plans to acquire more equipment for lessons and rentals and to expand club facilities. The board plans to purchase about $50,000 of new equipment each year and wants to begin a fund to purchase a $600,000 piece of property for club expansion.
Cost Accounting: Its role and ethical considerations Introduction: Accounting is the process of identifying, measuring, and communicating economic information about an entity for the purpose of making decisions and informed judgements. The major areas of within the accounting are: Financial Accounting, Managerial Accounting/Cost Accounting and Auditing- Public Accounting Managerial accounting is concerned with the use of economic and financial information to plan and control the activities of an entity and to support the management in planning and decision-making process. Cost accounting is the subset of managerial accounting and it helps management in determination and accumulation of product, process or service cost.
In many models of personal computers, the system unit is the tall and narrow _____, which can sit on the floor vertically — if desktop space is limited.
Erin should notify Smart Worx of the postponement as it is consistent with ethical principles of integrity and professional competence. As Erin is complying with these codes of ethics, she has nothing to lose or suffer as she followed the guidelines of the code and therefore cannot be
In this paper we extend the costing approaches and the two different approaches which include Variable costing and Absorption costing. This paper explains the difference between variable costing and absorption costing. All successful companies around the world use a strategic business plan that leads to a tactical plan and an operation plan which lead to the execution; both of the costing approaches, variable and absorption costing, to help their business flourish. Variable costing and absorption costing are not to be substituted for one another since both the approaches have their own benefits and limitations to any unique situation. In this document we will discuss the different approaches variable and absorption costing uses, the
Title: Comparative Analysis Of Fair Value And Historical Cost Accounting On Reported Profit: A Study Of Selected Manufacturing Companies In Nigeria.