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Costs Involved
Cost incurred are broadly classified in to direct cost and indirect cost
•Direct cost – directly attributed to production
•Indirect cost – incurred in the course, but cannot be directly attributed to
production
In this business venture –
•Direct cost – Oil peas, onions, puris, tomatoes, Samosas, coriander, green
chillies, sev tamarind, chutneys(sauces), coconut salt, fuel, spices and
transport(freight) – Rs 486(per 100 plates).
•Indirect cost – Rent, electricity, anti rodent poison cakes, drinking water etc
(Rs 39 per 100 plates)
Cost also divided in to Fixed cost and variable cost
Cost that has to be incurred for the mere sustenance of the business irrespective
of the volume of business or trade is called – Fixed cost.
Rent paid, electricity charges are fixed cost no matter how the sales are in that
particular period.
Cost that depends heavily on the quantity of production or volume of the
business – Variable cost.
Oil peas, onions, puris, tomatoes, Samosas, coriander, green chillies etc are
dirteclty proprtional to the volume of the business i.e the number plates made
and sold
Varying cost – mutual relation between volume and variable cost – volume can
alter it & it can alter volume
In this case it can also depend on the process undertaken – Different dishes
produced i.e Sev Puri, pani puri etc
Break-Even Analysis
TFC is Total Fixed Costs, P is Unit Sale Price, and V is Unit Variable
Cost.
The quantity (P-V) is of interest in its own right, and is called the Unit
Contribution Margin (C). It is the marginal profit per unit, or alternatively the
portion of each sale that contributes to Fixed Costs.
Computation
Graphical method: We first draw the
total cost curve (TC in the diagram),
the fixed cost curve (FC) and finally the
various total revenue lines (R1, R2, and
R3) which is the total revenue received
at each output level, given the price
you will be charging.
The break even points (A,B,C) are the
points of intersection between the total
cost curve (TC) and a total revenue
curve (R1, R2, or R3). The break even
quantity at each selling price can be
read off the horizontal axis and the
break even price at each selling price
can be read off the vertical axis.
Cost Sheet of a Chat stall per da
per 100plates FactoryOverheads
Fixed
rent - Rs 2000/pm(for ashop 10hours and 5hours for the pani puri2
SemiFixed
SP is Rs 10
Component Rs
Sales 1000
Variable cost 486
Contribution 514
Case
Com ponent
Sales
Variablecost
Contribution
Fixe
Case2: SPisRs8d cost
Total Cost
Component Rs Rs
Profit
Sales 800 61
Variable cost 48
P6
Vratio 37
Contribution 31
B4
Esales 24
Case 3: SPisRs12
Component Rs
Sales 1200
Variable cost 486
Contribution 714
Fixed cost 24
Stock control
Reorder level: This is the level at which storekeeper initiates purchase
requisition for fresh supplies of material.
Minimum level: This represents a level which the stock will reach with
fresh delivery of material provided the fresh delivery is made within the
reorder period and usage remains normal during the period. Stock is not
allowed to fall below this level. It is known as buffer stock.
Maximum level: This represents the stock level above which the stock
should not be allowed to rise. It is computed as reorder level plus reorder
quantity minus minimum consumption during reorder period.
Stock turnover and average stock-holding: Stock turnover ratio for a
period is calculated as follows:
Stock turnover ratio=cost of materials used divided by average stock of material
held during that period
Average stock holding is obtained by:-
1) averaging opening and closing stocks.
2) averaging minimum and maximum levels of stock.
3) minimum stock plus half of reorder quantity.
Reorder quantity: this refers to the quantity to be covered in a single
purchase order.
Carrying cost and ordering cost: cost of carrying includes rent, insurance
and other cost of storage, interest on capital blocked, losses and pilferage, risk of
obsolescence, etc. Cost of ordering consists of the cost of placing an order,
setting up of production-run, transportation and receiving cost. Carrying cost is
fixed while ordering cost is variable.
Economic order quantity (EOQ): EOQ is the quantity fixed at a point
where total cost of ordering and the cost of carrying the inventory will be
minimum.
Inventory calculation
Economic Order Quantity
Reorder Level
Reorder Level = Maximum Consumption * Max lead time
= 1050 * 2 days
= 2100
Minimum Level
= 2100 – 700 * 1
= 1400
Maximum Level