Cost analysis in managerial economics. Cost Concepts and Analysis I 2019-01-12
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Managerial Economics Notes for MBA
These incremental costs can include both implicit and explicit costs. It can be arrived by dividing the change in total cost by the change in total output. Risk Assessment The business world is changing and due to several internal s well as external threats associated with any industry, businesses have to face too many risks. And also known as Planning Curve as it series as guide to an entrepreneur in his planning to expand the production in future. This can be done by finding the break even volume and then using it to make graphical representations. Management Economics teaches us that any business is required to make proper management to move forward.
If they are regarded as excessive, management can indulge in post-mortem checks just to find out the factors responsible for the excessive costs, if any, without being able to do anything about reducing them. Her teaching interests are mainly in operations process management, including product development and design, operation and technology strategy, and project management. Sunk Costs and Incremental Costs Sunk costs are expenditures that have been made in the past or must be paid in the future as part of contractual agreement or previous decision. Industry and Trade Policies of Govt. For example, suppose that a person has a sum of Rs.
Even though the firm does not incur any actual expenses to use these inputs, they are not free, since the firm could sell or, rent them out to other firms. Although, no monitory transaction has occurred and thus would not appear as an accounting cost , the business nonetheless incurs an opportunity cost because the owner could have earned a competitive salary by working elsewhere. It is not changed by the changes in the volume of production. The shape of the total variable cost curve, and hence the shape of the total cost curve, is determined by the productivity of variable input factors employed. See our and for details. The purchase of this new machine will tend to increase fixed costs of an organization.
Therefore, it is essential to discover economic costs and measure them for effective profit planning, cost control and sound pricing practices. Therefore, the managers will have to consider the environmental factors in the process of decision-making. On the other hand, actual costs are those which are actually incurred by the firm in payment for labour, material, plant, building, machinery, equipment, travelling and transport, advertisement, etc. He asked help of a friend who is an accountant by profession to prepare annual income statement. Sometimes the actual costs are also called acquisition costs or outlay costs. The U-shape implies lower and lower average cost in beginning until the optimum scale of the firm is reached and successively higher average cost thereafter.
This is often done by converting the future expected streams of costs and benefits into a amount with a. It varies with the formula adopted for allocation and is independent of the actions of the supervisor. Normal profit is a necessary minimum earning in addition to the opportunity cost, which a firm must get to remain in its present occupation. Variable input factors exhibit increasing returns in the range from 0 to Q1 units and show diminishing returns thereafter. Benefit-Cost Analysis: Financial and Economic Appraisal using Spreadsheets. Marginal cost is that sub category of incremental cost in the sense that incremental cost may include both fixed costs and marginal costs However, when production is not conceived in small units, management will be interested in incremental cost instead of marginal cost.
How does marginal analysis help in managerial decisions?
In other words, it is that time-span in which all adjustments and changes are possible to realise. For instance, suppose an entrepreneur does not utilize his services in his own business and works as a manager in some other firm on a salary basis. Similarly, plying cars, buses, trucks, etc. Historical cost of assets is used for accounting purposes, in the assessment of net worth of the firm. The more successful a manager is in reducing uncertainty, the higher are the profits earned by him. Week 8 Types of competitive bids and price quotes. International Journal of the Addictions.
Thus, under the assumptions of cost-average marginal cost expansion and variable costs, 2. Expenditures on depreciation, rent of land and buildings, property taxes, and interest payment on bonds are examples of fixed costs. The table is prepared on the basis of the Law of Diminishing Marginal returns. An increase in total output results in an increase in total variable costs and decrease in total output results in a proportionate decline in the total variable costs E. Common or indirect costs are those that are not traceable to any plant, department or operation, or to any individual final product.
SUNK COSTS IN DECISION ANALYSIS in Managerial Economics
For example, salary of owner manager, if not paid, is a book cost. Thus, the incremental costs of a decision to increase output level will include all present-period explicit costs, which will be incurred as a consequence of this decision. Although, the accounting cost of Mr. On the other hand, book costs are those business costs, which do not involve any cash payments but for them a provision is made in the books of account to include them in profit and loss accounts and take tax advantages. The book first lays a sound theoretical foundation of basic concepts, defi-nitions, and methodologies of economics, being an essential prerequisite for students to understand the theory of managerial economics.
These costs are not actually incurred but would have been incurred in the absence of employment of self- owned factors. Any costs not affected by available decision alternatives are sunk and irrelevant. Therefore, due to the strange mix of science and art in managerial economics, it is given the Name of scientific art, it is both science and art. Replacement cost relates to the current price of that asset and it will be known only if an enquiry is made in the market. Conclusion Thus, The areas of managerial economics are now going through a developing phase and many of these students are there. Current cost is the amount that must be paid under prevailing market conditions. Raw material, labour involved in production are examples of traceable cost.
With an inflation rate of roughly 5 percent per year, prices double in less than 15 years and triple in roughly 22 years. Postponable costs refer to those costs which can be postponed at least for some time e. The foregone rent is an opportunity cost of utilizing the office space and should be included as part of the cost of doing business. In the long run firm can change its output according to its demand. The concepts of direct and indirect costs are meaning-less without identification of the relevant costing unit. Some Analytical Cost Concepts : 5.
