Total Cost Function for a Production System Exhibiting Increasing, Then Decreasing, Returns to Scale
What Makes Cost Analysis Difficult?
Historical Versus Current Costs
Historical cost is the actual cash outlay. Current cost is the present cost of previously acquired items. For assets purchased recently, historical cost and current cost are typically the same. For assets purchased several years ago, historical cost and current cost are often quite different.
Economic vs. Accounting Costs
Accounting: record and track receipt of and expenditure
of money. Helps establish responsibility for assets and reduce theft. The records help managers determine if operations are working as expected and are required by tax and regulatory authorities. It is a system of controls. Economics: considers the value of assets determined by usefulness to current owner compared with alternative means of producing same services and considers potential use (opportunity cost) to other possible owners of the assets.
Marginal cost involves a single unit of output.
Sunk Cost
Irreversible expenses incurred previously. Sunk costs are irrelevant to present decisions. In managerial decision making, care must be taken to ensure that only those costs actually affected by a decision are considered.
What Makes Cost Analysis Difficult?
Link Between Accounting and Economic Valuations
Accounting and economic costs often differ. Accounting numbers are very important management tools. But they can never account for all opportunity costs. Managers must see these within their own organization. Sometimes managers only focus on accounting numbers and drive the firm into bankruptcy.
Economic vs. Accounting Costs
Book Profit=Total Revenue - Explicit Cost Economic Profit=Total Revenue - Explicit CostImplicit Cost= Book Profit - Implicit Cost
Cost Analysis and Estimation
Chapter 6
Chapter 6 OVERVIEW
What Makes Cost Analysis Difficult Opportunity Cost Incremental and Sunk Costs in Decision Analysis Short-run and Long-run Costs Short-run Cost Curves Long-run Cost Curves Minimum Efficient Scale Firm Size and Plant Size Learning Curves Economies of Scope Cost-volume-profit Analysis
Incremental and Sunk Costs in Decision Analysis
IncrementalБайду номын сангаасCost
Incremental cost is the change in cost tied to a managerial decision. Incremental cost can involve multiple units of output.
Chapter 6 KEY CONCEPTS
historical cost current cost replacement cost opportunity cost explicit cost implicit cost incremental cost profit contribution sunk cost cost function short-run cost functions long-run cost functions short run long run planning curves operating curves fixed cost variable cost short-run cost curve long-run cost curve economies of scale cost elasticity capacity minimum efficient scale multiplant economies of scale multiplant diseconomies of scale learning curve economies of scope cost-volume-profit analysis breakeven quantity
Fixed and Variable Costs
Fixed cost is a short-run concept. All costs are variable in the long run.
Short-run Cost Curves
Short-run Cost Categories
Total Cost = Fixed Cost + Variable Cost For averages, ATC = AFC + AVC Marginal Cost, MC = ∂TC/∂Q
Short-run Cost Relations
Short-run cost curves show minimum cost in a given production environment.
Short-Run Cost Curves
Long-run Cost Curves
Long-run cost curves show the minimum cost impact of output changes assuming an ideal input selection. Any change (e.g. product inventions, process improvements) in the operating environment leads to a shift in long-run cost curves. Such changes must not be confused with movements along a given long-run cost curve caused by changes in the output level. Long-run cost curves reveal the nature of economies or diseconomies of scale and optimal plant sizes. They are helpful guide to planning decisions.
Replacement Cost
Cost of duplicating productive capacity using current technology. In valuing some assets (e.g. computers and electronic equipment), the appropriate measure is the much lower replacement cost―not the historical cost.
Economic vs. Accounting Costs
Economic costs = Accounting costs – Sunk costs + Opportunity costs Economic costs are forward looking. Accounting costs are backward looking. Accounting costs always include the purchase cost of the input. Economic costs may or may not. Economic costs always include opportunity costs. Accounting costs never include opportunity costs.