Costs

In: Business and Management

Submitted By Bettymay79
Words 981
Pages 4
ASSIGNMENT 2: ECONOMIES AND DESECONOMIES OF SCALE AND HOW THEY AFFECT COST.
ECONOMIES OF SCALE
When more units of a good or service can be produced on a larger scale with less input costs, then economies of scale are achieved. Economic growth is achieved when economies of scale is realized, this then implies that as a company grows and production units increase, the company will have a better chance to decrease its costs. There economies of scale are the cost advantages that a company obtains due to expansion, which leads to unit cost reduction as the scale of operations increase.
There are two sources of economies of scale: internal and external economies. Internal economies are specific to a company while external economies of scale are beneficial to all the entire industry.
Internal economies of scale include the following:
1. Labour economies- Increased of labour is a major source of labour economies. The extent of division of labour is preconditioned by the scale of output. As output increases and the labour force grow, a greater degree of specialization, with all its advantages, may become possible.
2. Technical Economies- Technical economies of scale occur when a business invests in new technology and is able to increase production. As a result, production costs per unit will fall. For example:

a) Economies of superior technique:
* Firms can use high technique and capital goods.
* Firms can install high quality machine and capital goods.
* Using these, will result in more efficiency, reducing the cost per unit of output.
b) Economies of increased dimension:
– Large pieces of equipment are relatively more economical than small ones Eg. A Double decker bus is more economical than a single decker.
c) Economies of linked process:
– Large firms enjoy advantage of linking of process by arranging…...

Similar Documents

Cost Method

...Activity Based Costing Example / Problem: Learning Objectives: 1. Perform the first stage allocation of overhead costs to the activity cost pools. 2. Compute activity rates for the activity cost pools. 3. Construct a table showing the overhead costs of units and four orders. Ferris Corporation makes a single product - a fire resistant commercial filing cabinet - that it sells to office furniture distributors. The company has a simple ABC system that it uses for internal decision making. The company has two overhead departments whose costs are listed below:   |Manufacturing overhead |$5,00,000 | |Selling and administrative overhead |$300,000 | |  |[pic] | |Total overhead costs |$8,00,000 |  The company's activity based costing system has the following activity cost pools and activity measures:   |Activity Cost Pool |Activity Measures | |Assembling units |Number of units | |Processing orders |Number of orders | |Supporting customers |Number of customers | |Other |Not applicable...

Words: 568 - Pages: 3

Cost Allocation

...Cost Allocation ACC/561 April 23, 2012 Cost Allocation The purpose of cost allocation is to identify and correctly allocate costs associated with a job, product, or service. The main uses of cost allocation are to facilitate decision-making regarding costs, justify prices charged for products and services, cost control, and for optimal utilization of resources. There are several methods used for cost allocation, depending on the type of product or service offer by the company. Variable cost allocation includes only variable manufacturing costs, such as direct materials, direct labor, and variable manufacturing overhead. Absorption cost allocation includes manufacturing costs, including both variable and fixed overhead as well as direct labor and materials. There are advantages and disadvantages of each method, and these will be explored further. Methods of Cost Allocation There are three main methods of cost allocation used by businesses: The Direct Method, the Step Method, and the Reciprocal Method. The direct method, which is the simplest of the three, allocates the costs of service departments directly to operating departments. Under the direct method, there are no costs allocated from one service department to another service department regardless of how much service may be provided between them. For instance, there would be no cost allocation between a custodial department and the mail room, even though the custodial department cleans the mail room...

Words: 979 - Pages: 4

Cost Methods

...Cost Methods Super Bakery Inc. was created in 1990 by Franco Harris who is a former Pittsburgh Steelers’ running back. This company supplies baked goods and different types of doughnut to stores nationwide. This paper will discuss the strategies that management used, why management thought it was necessary to install an ABC system, and which cost system would work for Super Bakery. Management Strategies Since Super Bakery is a virtual corporation, only the core business functions are handled inside the company. All other functions are outsourced to external companies. These activities include warehousing, shipping, selling, and manufacturing. Outsourcing is the stategy that management uses at Super Bakery. The idea is to organize the work flow among the external companies by making the minimum investment in staff and assets, while at the same time adding maximum value to the company. ABC System Super Bakery was having problems controlling the cost of activities that were outsourced. Because of this, management decided that it was time to switch from its traditional cost method to a cost method that would more suit the company’s needs. The traditional system made it seem that every order cost the same to complete, when really it was not like that all. The new cost system could identify the costs that were associated with each activity performed and it showed that the profit margins and the costs on each sale varied a significant amount. I agree that it was...

Words: 381 - Pages: 2

Cost Cost

...Part of the process of pricing your product is including the costs of producing that product. Those costs include the direct and indirect costs associated with producing your product. Direct Costs Direct costs are costs that can be easily traced to a particular object (also called a cost object), such as a product, the raw materials used to manufacture a product, or the labor associated with the work to produce the product. If your company produces a widget and a production manager is hired to oversee production of that widget, then the production manager's salary is a direct cost. If you own a carpet cleaning business, which is a service organization, and you hire workers just to clean carpets, their wages are direct costs. Direct costs are often, but not always, variable costs. Variable costs increase as more units of the product are manufactured. As a result, raw materials are variable and direct costs. But, if there is a supervisor overseeing the manufacturing of this particular product, their salary is probably the same regardless of how much of the product is manufactured, so it is a fixed cost. Direct Materials and Direct Labor The most common direct costs are direct materials and direct labor. Direct materials are the materials that can be specifically identified with the product. If you are a furniture maker, your direct materials would be the wood that goes into making your furniture along with the nails, varnish, and other products that you apply...

Words: 644 - Pages: 3

Cost Accounting

...Solution4: Total and unit cost, decision making 60,000 Tota Manufacturin Costs al ng 50,000 40,000 Variable Costs 30,000 20,000 10,000 10 000 0 0 5,000 Num ber of Flanges 10,000 Total Manufacturing Costs Fixed Costs Note that the production costs include the $20,000 of fixed manufacturing costs but not the $10,000 of period costs. The variable cost is $1 per flange for materials, and $2 per flange $ p g , $ p g for direct manufacturing labor. 47 Solution4: Total and unit cost, decision making Graham’s Glassworks cannot sell below $8.25 per flange and make a profit; the company will have an operating loss of $3,750. 48 Solution4: Total and unit cost, decision making Graham’s Glassworks can sell at a price below $8.25 per flange and still make a profit. The company earns g p p y operating income of $22,500 at a price of $8.25 per flange. 49 Solution4: Total and unit cost, decision making The reason the unit cost decreases significantly is that inventoriable (manufacturing) fixed costs and fixed period (non manufacturing) costs remain the same regardless of the number of g units produced. As Graham s Glassworks produces more units, Graham’s units fixed costs are spread over more units, and cost per unit decreases. p This means that if you use unit costs to make decisions about pricing and which product to pricing, produce, you must be aware that the unit cost only applies to a particular level of output. y pp p p 50 ...

Words: 262 - Pages: 2

Cost

... a significant effect on Costco’s operations, and the operations of its suppliers. Adverse weather can affect the availability and prices of the goods Costco sells. Because Costco carries a large and diverse number of products, it can be indirectly affected my nearly any macro factors. UOIG 4 University of Oregon Investment Group 4/26/2013 Competition The industry is highly competitive, and competes in terms of pricing and volume. There are about 1200 discount warehouses in operation in the U.S. Supply chain efficiency is a huge part that determines how competitive a player is in the industry. The supply chain structure is what allows Costco and Walmart to execute its business strategy of passing down lower costs to consumers. Supply chain decisions include carrying a low number of branded products and reducing product handling to reduce overhead costs. As a company that deals largely with consumer staples, future innovations are not expected to affect Costco from an operation perspective. However, leverage of information technology and new developments in the area has and will continue to prove to be a significant area of competitive advantage. Especially regarding flow of inventory and supply chain activities, leverage of increasingly sophisticated ERP systems and inventory management systems may provide significant cost saving and economies of scale, which will continue to strengthen Costco’s position as one of the market leaders in the retail sector...

Words: 11035 - Pages: 45

Cost

...Question 1. Costs may be broadly classified as: Selling and administrative Product and marginal Fixed and variable Fixed and indirect Question 2. For a hot bread shop, which of the following costs would most likely be classified as variable rather than fixed? Flour Advertising Equipment lease payments Rent of premises Question 3. Which statement is correct in relation to fixed costs per unit of output? They stay the same irrespective of the level of activity They increase as the level of activity increases They decline as the level of activity declines None of the above Question 4. A total cost line is non-linear and of a convex nature, when it is: A fixed cost A linear variable cost Expenses involving economy of scale benefits Expenses where a high level of demand caused supply shortages Question 5. Which of the following would not normally represent an example of a semi-variable (semi-fixed) cost? Spare parts-vehicle service centre Electricity-hairdresser Telephone-butcher Depreciation of equipment Question 6. What does the point where the total cost line cuts the revenue line represent? Break-even point Relevant range The margin of safety Total fixed cost Question 7. What statistical technique can be used to determine the fixed and variable components of different cost types? Probability analysis Regression analysis Correlation Factor analysis...

Words: 750 - Pages: 3

Cost Management

... management is not only “monitoring” of costs and recording perhaps massive quantities of data, but also analyzing the data in order to take corrective action before it is too late. Cost management should be performed by all personnel who incur costs not merely the project office. Cost management must include cost estimating, cost accounting, project cash flow, company cash flow, direct labor testing, and overhead rate costing. 2.0 History and Development of Cost Management Management accounting firstly is known as cost accounting. The development of cost accounting and management control practices in US has been traced by Thomas Johnson. In 19th century, textile mills and railroads firms had devised internal administrative procedures because the demand for information for internal planning and control had arisen. Thomas Johnson had explains that there was a New England textile mill which implement for cost accounting system. The cost accounting system was enabling the managers to calculate whether conversion of raw materials into finished goods is efficiency by provide the information on the cost of finished goods. After that, there will be the newly formed mass distribution and mass production was introduced and adapted by the nationwide wholesale later in the 1880s. The wholesale and retail distributors able to produced highly detailed data on sales turnover by department and geographic area. However, the past performance reports was very similar to those reports that......

Words: 5085 - Pages: 21

Cost

..., firms are a bit less lazy than they were. Although profit is one goal of a firm, often firms focus on other intermediate goals such as cost and sales. The Lazy Monopolist and X-Inefficiency Lazy monopolists are not profit maximizers; they see to it that they make enough profit so that the stockholders aren’t squealing, but they don’t push as hard as they could to hold their costs down. They perform as efficiently as is consistent with keeping their jobs. The result is what economists call X-inefficiency (firms operating far less efficiently than they could technically). Such firms have monopoly positions, but they don’t make large monopoly profits. Instead, their costs rise because of inefficiency; they may simply make a normal level of profit or, if X-inefficiency becomes bad enough, a loss. The standard model avoids dealing with the monitoring problem by assuming that the owner of the firm makes all the decisions. The owners of firms who receive the profit, and only the profit, would like to see that all the firm’s costs are held down. Unfortunately, very few real-world firms operate that way. In reality owners seldom make operating decisions. They hire or appoint managers to make those decisions. The managers they hire don’t have that same incentive to hold costs down. Therefore, it isn’t surprising to many economists that managers’ pay is usually high and that high-level managers see to it that they have “perks” such as chauffeurs, jet planes, ritzy offices, and...

Words: 9559 - Pages: 39

Cost

...CHAPTER 2 QUANTITY TAKE-OFF The quantity “takeoff” is an important part of the cost estimate. It must be as accurate as possible and should be based on all available engineering and design data. Use of appropriate automation tools is highly recommended. Accuracy and completeness are critical factors in all cost estimates. An accurate and complete estimate establishes accountability and credibility of the cost engineer, therefore, providing greater confidence in the cost estimate. The estimate contingencies for programming purposes reflect the estimate confidence. 2.1 Importance of Quantity Takeoff and Required Documents The quantity of material in a project can be accurately determined from the drawings. The estimator must review each sheet of the drawings, calculate the quantity of material and record the amount and unit of measure. Each estimator must develop a system of quantity takeoff that ensures that a quantity is not omitted or calculated twice. A wellorganized check-list of work will help reduce the chances of omitting an item. The estimator must, also, add an appropriate percentage for waste for those items where waste is likely to occur during construction. The material quantity takeoff is extremely important for cost estimating because it often establishes the quantity and unit of measure for the costs of labor and contractor’s equipment. 2.1.1 Contract documents The contract is defined by the contract documents, which are developed...

Words: 2097 - Pages: 9

Cost

...Solution of 2012 Mid Term Exam Cost Accounting- Third Year Question No. One: 1- ABC Company Schedule of Cost of Goods Manufactured For October Direct material costs Beginning inventory of Direct Materials 4,000 Direct materials purchased ………………………135,000 =Cost of direct materials available for use………..139,000 (-)Ending inventory of Direct Materials………….. (5,000) Direct materials used…………………………………………………………….…134,000 Direct manufacturing labor costs………………………………………………….…50,000 Manufacturing overhead costs Salaries of factory supervisors………………….....15,000 Salaries of factory managers ……………………...10,000 Factory supplies (3000+8000-2500)……………......8,500 Factory rent…………………………………………9,500 Factory depreciation……………………………....25,000 Total Manufacturing overhead costs …………………………………………….…...68,000 Total Manufacturing costs………………………………………………………….252, 000 Add beginning work-in-process inventory, ……………………………………….…13,000 Deduct ending work-in-process inventory, ………………………………………… (15000) Cost of goods manufactured (to income statement) ………………………………$ 250,000 2- ABC Company Income Statement For March 2011 Revenues ( 8000* 50)………………………………………………………………400,000 Cost of units sold: Beginning finished goods, ……………………………… 0 Cost of goods manufactured ………………………….250,000 Cost of goods available for sale……………………….250, 000 Ending finished goods (2000 units* $25)………....... (50,00) Cost of Units sold…………………………………………………………………….(200,000) Gross margin...

Words: 472 - Pages: 2

Cost Management

...Dmitry Konev 5916697 One of the most important accounting concepts for managers to make short and long-term decisions is cost function. In other words, this concepts helps managers to predict future costs using historical accounting and non-accounting data, assumptions and qualitative factors. This concept helps to estimate costs of goods production, facilitation or other business activities. First, cost is identified as fixed or variable. Fixed costs are not changed when the quantities number of goods or services change, so it will occur whether production occurs and include overhead, administrative salaries, insurance . On the other hand, variable costs depends on the number of units and can include direct materials, labour, sales commissions. This concept is useful for the businesses in case they have enough data to make predictions. Additionally, the cost function is reliable only for relevant range and will change below or above this range. Generally, total cost include fixed costs and variable costs per unit multiplied by units. For example, we are considering opportunity to celebrate New Year together with classmates and friends in Toronto or Greater Toronto Area. In that case we need to rent a house, to buy food and drinks, to buy fireworks. However, the number of people can be between 10 and 20 people depending on the results of our discussion and other factors such as MBA Games, which started on the 2nd of January. The cost of the house for up to 14 people...

Words: 443 - Pages: 2

Cost

...CLASSIFICATION OF COSTS: Manufacturing We first classify costs according to the three elements of cost: a) Materials b) Labour c) Expenses Product and Period Costs: We also classify costs as either 1      Product costs: the costs of manufacturing our products; or 2      Period costs: these are the costs other than product costs that are charged to, debited to, or written off to the income statement each period. The classification of Product Costs: Direct costs: Direct costs are generally seen to be variable costs and they are called direct costs because they are directly associated with manufacturing. In turn, the direct costs can include: Direct materials: plywood, wooden battens, fabric for the seat and the back, nails, screws, glue. Direct labour: sawyers, drillers, assemblers, painters, polishers, upholsterers Direct expense: this is a strange cost that many texts don't include; but (International Accounting Standard) IAS 2, for example, includes it.  Direct expenses can include the costs of special designs for one batch, or run, of a particular set of tables and/or chairs, the cost of buying or hiring special machinery to make a limited edition of a set of chairs. Total direct costs are collectively known as Prime Costs and we can see that Product Costs are the sum of Prime costs and Overheads. Indirect Costs: Indirect costs are those costs that are incurred in the factory but that cannot be directly...

Words: 767 - Pages: 4

Cost

... Management 1.3 Essential Features of Project Value Management 1.4 Organization of the Book References 2 2 6 8 9 14 Project Needs Assessment, Concept Development, and Planning 17 2.1 2.2 2.3 2.4 2.5 Needs Identification Conceptual Development The Statement of Work Project Planning Project Scope Definition 2.5.1 Purpose of the Scope Definition Document 2.5.2 Elements of the Scope Definition Document 2.5.3 Project Scope Changes 2.6 Work Breakdown Structure 2.6.1 Types of Work Breakdown Structures 2.6.2 Work Breakdown Structure Development 2.6.3 Coding of Work Breakdown Structures 2.6.4 Integrating the WBS and the Organization 2.6.5 Guidelines for Developing a Work Breakdown Structure References 3 19 22 23 27 28 29 29 30 32 34 35 38 38 Cost Estimation 43 3.1 3.2 44 45 Importance of Cost Estimation Problems of Cost Estimation v 42 42 vi Contents 3.3 3.4 3.5 Sources and Categories of Project Costs Cost Estimating Methods Cost Estimation Process 3.5.1 Creating the Detailed Estimate 3.6 Allowances for Contingencies in Cost Estimation 3.7 The Use of Learning Curves in Cost Estimation References Appendix 4 49 51 56 56 59 61 64 67 Project Budgeting 83 4.1 4.2 83 85 85 85 86 86 87 88 89 90 90 90 91 91 92 93 93 94 95 95 96 97 98 99 Issues in Project Budgeting Developing a Project Budget 4.2.1 Issues in Creating a Project......

Words: 94122 - Pages: 377

Cost

...42. Feedback regarding previous actions may affect a. future predictions. b. implementation of the decision. c. the decision model. d. all of the above. Answer: d Difficulty: 2 Objective: 1 43. Place the following steps from the five-step decision process in order: A = Make predictions about future costs B = Evaluate performance to provide feedback C = Implement the decision D = Choose an alternative a. D C A B b. C D A B c. A D C B d. D C B A Answer: c Difficulty: 2 Objective: 1 44. The formal process of choosing between alternatives is known as a. a relevant model. b. a decision model. c. an alternative model. d. a prediction model. Answer: b Difficulty: 1 Objective: 1 45. Ruggles Circuit Company manufactures circuit boards for other firms. Management is attempting to search for ways to reduce manufacturing labor costs and has received a proposal from a consulting company to rearrange the production floor next year. Using the information below regarding current operations and the new proposal, which of the following decisions should management accept? Currently Proposed Required machine operators 5 4.5 Materials-handling workers 1.25 1.25 Employee average pay $8 per hour $9 per hour Hours worked per employee...

Words: 7235 - Pages: 29