Calculate Total Cost and Per-Unit Cost for a Given Production Volume Intermediate Cost Analysis and Management © How does total cost change as level of activity changes? © Terminal Learning Objective • Task: Calculate Total Cost and Per-Unit Cost for a Given Production Volume • Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard: With at least 80% accuracy: • • • • • Differentiate between fixed and variable costs Express total and per-unit variable cost in an equation Graph total and per-unit variable cost Express total and per-unit fixed costs in an equation Graph total and per-unit fixed costs © Why Study Cost Relationships? • Understanding what drives cost helps to understand how to reduce cost • Recognizing cost relationships helps to define what views of cost are useful © What is Cost Relationship? • Describes the change in cost that occurs with a change in a variable • Examples: • As number of students in class increases, total cost of class increases • As snowfall increases, cost of snow removal increases • As number of miles driven increases, total cost of trip increases â Cost Terminology Direct Costs MATERIALS and LABOR that can be Identified with a particular product or process • Example: Lumber and hardware for furniture • Indirect Costs • PRODUCTION-RELATED costs that cannot be Identified with a particular product or process • Example: Maintenance on power tools â Cost Terminology Manufacturing Overhead An AGGREGATION of indirect productionrelated costs • Will be ASSIGNED to products or processes and become part of the cost of the product of machinery, labor, utilities â Check on Learning • Costs that can be identified with a particular product or process are called • An aggregation of indirect costs is called © What is Cost Expression? • Communicates a cost relationship using verbal, numerical and mathematical symbols • Use plain language rather than variables x, y, z, etc • Use math symbols • • • • Add (+) Subtract (–) Multiply (*) Divide (/) • Example: Cost of hotel stay = Cost per day * # of days â Which Cost Expression is Useful? Sometimes it is useful to know Total Cost • Relevant cost of all inputs required to achieve desired output • Example: Cost of PCAM = instructor pay + course materials + classroom facilities + students’ pay • Sometimes it is useful to know Unit Cost • Unit cost = Total cost / # units • Example: Cost to train one student © 10 Graph of Unit Fixed Cost Unit Cost = Total Fixed Cost/# Units $25,000 $20,000 $15,000 At 40 units, Unit Fixed Cost = $124,000/40 units or $3,100 per unit $10,000 $5,000 $3,100 $0 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 X Axis = Number of units As # units increases, Unit Fixed cost decreases © 34 Graph of Unit Fixed Cost Unit Cost = Total Fixed Cost/# Units $25,000 $20,000 $15,000 At 75 units, Unit Fixed Cost = $124,000/75 units or $1,653 per unit $10,000 $5,000 $1,653 $0 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 X Axis = Number of units As # units increases, Unit Fixed cost decreases â 35 Check on Learning How is Total fixed cost represented on the graph? • How is Unit fixed cost represented on the graph? © 36 Cost Definitions • Mixed Costs - A combination of fixed and variable costs Total Cost = Variable Cost + Fixed Cost • Also known as multivariate costs © 37 Multivariate Cost Expressions • Variable component: • Variable $Cost per Unit * # Units -Plus• Fixed component: • Sum of relevant costs that remain the same regardless of units of output © 38 Demonstration Problem • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair • Which costs are fixed? • Which are variable? • What is total cost of 100 repairs? 200 repairs? • What is unit cost for 100 repairs? 200 repairs? © 39 Demonstration Problem • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair • Which costs are fixed? Shop Rent Staff Salaries Total Fixed $5,000 5,000 $10,000 â 40 Demonstration Problem A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair • Which costs are variable? Parts per repair $220 Commission per repair Total $420 200 â 41 Demonstration Problem A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair • What is total cost of 100 repairs? 200 repairs? Total cost= $420 per repair * # repairs + $10,000 $420 per repair*100 repairs+$10,000 = $52,000 $420 per repair*200 repairs+$10,000 = $85,000 © 42 Graph of Mixed Cost $K 100 90 80 70 60 50 Fixed Cost 40 30 20 300 280 260 240 220 200 180 160 140 120 100 80 60 40 0 20 10 X Axis = Number of Repairs As Number of Repairs increases, Fixed Cost does not change © 43 Graph of Mixed Cost $K 100 Variable cost for 200 repairs= $420 per repair * 200 repairs = $84,000 90 $84K 80 70 60 50 Fixed Cost Variable Cost 40 30 20 300 280 260 240 220 200 180 160 140 120 100 80 60 40 0 20 10 X Axis = Number of Repairs As Number of Repairs increases, Variable Cost increases © 44 Graph of Mixed Cost $K 100 $94K 90 Total cost for 200 repairs = $420 per repair * 200 repairs + $10,000 or $94,000 80 70 60 Fixed Cost Variable Cost Total Cost 50 40 30 20 300 280 260 240 220 200 180 160 140 120 100 80 60 40 0 20 10 X Axis = Number of Repairs 45 As Number of Repairs increases, both Variable Cost and Total Cost increase © Demonstration Problem • A vehicle repair shop incurs an average parts cost per repair of $220 Shop rent is $5,000 per month Staff salaries are $5,000 per month and technicians earn a commission on repairs that averages $200 per repair • What is unit cost for 100 repairs? 200 repairs? Unit cost = Total cost / # repairs Total @100 repairs $52,000 / 100 repairs = $520 Total @200 repairs $94,000 / 200 repairs = $470 © 46 Question • How would the graph of Cost per Repair appear? • It should be a downward sloping curve that will level out above $420 • Cost per repair will never drop below $420 (variable cost) © 47 Practical Exercises © 48 ... Standard: With at least 80% accuracy: • • • • • Differentiate between fixed and variable costs Express total and per-unit variable cost in an equation Graph total and per-unit variable cost Express total. .. an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard:...How does total cost change as level of activity changes? © Terminal Learning Objective • Task: Calculate Total Cost and Per-Unit Cost for a Given Production Volume • Condition: You are training