Present econ studies

When alternatives for a specific tasks are being compared over one year or less and the influence of
time on money can be ignored, engineering economic analysis are referred to as present economy
studies.

Several situations involving present economy studies. The following rules or criteria will be used to
select the preferred alternative when defect-free output (yield) is variable or constant among the
alternatives:

RULE 1: When revenue and other economic benefits are present and vary among alternatives, Choose
the alternative that maximize overall profitability based on the number of defect-free units of a product
or service produced.

RULE 2: When revenue and other economic benefits are not present and or constant among all
alternatives, Consider only the costs and select the alternative that minimizes total cost per defect-free
unit of product or service output.

Total cost in material selection In many cases, economic selection among materials cannot be based
solely on the cost of materials. Frequently, a change in materials will affect the design and processing
costs, and shipping costs may also be altered.

Cost: It’s Concept and Elements

by Nitisha Cost

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In today’s competitive scenario, the main aim of every organization Is to earn maximum
profit. The organization’s decision of maximizing profit depends on the behavior of its
costs and revenues. In general terms, cost refers to an amount to be paid or given up
for acquiring any resource or service. In economics, cost can be defined as a monetary
valuation of efforts, material, resources, time and utilities consumed, risks incurred, and
opportunity forgone in the production of a good or service.

An organization incurs a number of costs, such as opportunity costs, fixed costs, implicit
costs, explicit costs, social costs, and replacement costs. On the other hand, revenue is
the income earned by an organization from the sales of goods or services. It excludes
deductions of tax, interest, and dividend paid by an organization. The level of
profitability of an organization can be determined by analyzing its costs and revenue.

Cost analysis involves the study of total costs incurred by an organization to acquire
various resources, such as labor, raw materials, machines, land, and technology. It
helps an organization to make various managerial decisions, including determination of
price and level of current production.

Apart from this, it enables an organization to decide whether to opt for the available
alternative or not. On the other hand, revenue analysis is a process of estimating the
total income earned by an organization from different’ sources. An organization is said
to be profitable if its total revenue is more than costs incurred by it.

Concept of Cost:
Cost, a key concept in economics, is the monetary expense incurred ‘by organizations
for various purposes, such as acquiring resources, producing goods and services,
advertising, and hiring workers. In other words, cost can be defined as monetary
expenses that are incurred by an organization for a specified tiling or activity.

According to Institute of Cost and Work Accountants (ICWA), cost implies

“measurement in monetary terms of the amount of resources used for the purpose of
production of goods or rendering services.” In terms of manufacturing, costs refer to
sum total -of monetary value of resources used in producing or manufacturing a
product. These resources can be raw material, labor, and land.

A cost comprises a number of elements, which are shown in Figure-1:

The different elements of cost (as shown in Figure-1) are explained as follows:
i. Material:
Helps in producing or manufacturing goods. Material implies a substance from which a
product is made For example, an organization requires materials, such as bricks and
cement for constructing a building.

Material is divided into two categories, which are as follows:

a. Direct Material:
Refers to a material that is directly related to a specific product, job, or process. Direct
material becomes an integral part of the finished product.
Some of the examples of direct material are as follows:
1. Timber is raw material for making furniture

2. Sugarcane for making sugar.

3. Textile for garment industry

4. Gold for making jewellery

5. Cans for tinned food and drink

b. Indirect Material:
Refers to a material that is not directly related to a particular product or activity. Such
materials cannot be easily identified with the product.

The examples of indirect material are as follows:

1. Oils for lubricating machines

2. Printing and stationary items for publishing books

3. Nails for making furniture

4. Threads for manufacturing garments

ii. Labor:
Acts as an important part of production. An organization requires labor to convert raw
materials into finished goods. Labor cost is the main element of cost.

Labor can be of two types, which are discussed as follows:

a. Direct Labor:
Refers to labor that takes an active part in manufacturing a product. This type of labor is
also known as process labor, productive labor, or operating labor. The costs related to
direct labor are called direct labor costs. These costs vary directly with the change in the
level of output, thus it is referred as a variable expense.

b. Indirect Labor:
Refers to labor that is not directly related to the manufacturing of a product. The indirect
labor cost may or may not vary with the change in the volume of output. This type of
labor is used in the factory, office, and selling and distribution department.

iii. Expenses:
Refer to costs that are incurred in the production of finished goods other than material
costs and labor costs.

Expenses are further divided into two parts:

a. Direct Expenses:
Imply the expenses that are directly or easily allocated to a particular cost center or cost
units. These expenses are called chargeable expenses. Some of the direct expenses of
an organization include acquiring machinery for special processes, fees paid to
architects and consultants, and costs of patents and royalties.

b. Indirect Expenses:
Refer to expenses that cannot be allocated to specific cost center or cost units. For
example, rent, depreciation, insurance, and taxes of building.

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