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Objectives
1. State the meaning of cost;
2. Understand direct and indirect cost;
3. Explain the elements of cost;
4. State the meaning of overheads;
5. Explain the classification of cost
COST
The amount of expenses incurred on or attributable
to specified thing or activity
Measurement in monetary terms of the amount of
resources used for the purpose of production of
goods or rendering services.
Can be expressed in terms of money
Cost in
Manufacturing/Production
OVERHEADS
Includes cost of indirect material, indirect
labor, indirect expenses
Overheads
Factory/works
Indirect material
Indirect wages
Indirect expenses
Office and administrative
Expenses related to management and administration
Selling and distribution overhead
Expenses related to sales of product
Cost behavior: FIXED
Fixed cost
A cost that remains constant with a given period
of time and range of activity
Fixed cost per unit decreases as product
increases
Examples: rent and salary of employees
Fixed cost per
Output (units) Total fixed cost
unit
0 10, 000 10,000
100 1,000 10
1,000 10,000 10
2,000 20,000 10
5,000 50,000 10
10,000 100,000 10
Imagine you are setting up a
small business, a fried chicken
How do you stand. You will not be
determine employing anyone you will be
working in a small rented unit.
the selling
1. Name some variable cost you
price of your
are likely to have
product? 2. Name some of the fixed cost
you are likely to have
COSTING
Computing cost of production
Cost = Material cost + Labor cost + Expenses
Break even point
Cost of production is equivalent to income
Income covers cost of production
You made 5 layers of lasagna. Cost are as follow:
Total cost of materials is $22
Total cost of labor $0
Total cost of expenses $2
(estimated cost of electricity
water and LPG)
1. Determine the break even point
2. How much should your selling price be?
A pineapple juice processing plant produces 2000
cans of juice every day. The processing plant has 15
employees working 8 hours a day at a wage rate of
$15/hour. Material cost is $4000 and total expenses is
$3000.
1. If the selling price of the pineapple juice is $4/can
will the product be profitable?
2. How much will the company gain/loss?
3. What is the break even point?
4. If the company wants to have a 50% profit what
should be the price of the product?