Chapter 2 – Cost Concept

Haslina Abdullah.
haslinaa@uthm.edu.my
 FUNDAMENTAL OF COST CONCEPTS
(6 HOURS)

⚫ 2.1 Introduction
⚫ 2.2 Cost Terminology
⚫ 2.3 Direct, Indirect and Standard Cost
⚫ 2.4 Sunk Cost
⚫ 2.5 Opportunity Cost
⚫ 2.6 Life-Cycle Cost
⚫ 2.7 Fixed Cost, Variable Costs and Total Costs
⚫ 2.8 Breakeven point
Costs can be categorized in several different ways.

⚫ Fixed cost (FC) (kos tetap): unaffected by changes in activity

level

⚫ Variable cost (VC) (kos berubah): vary in total with the

quantity of output (or similar measure of activity).
Fixed Cost Variable
(FC) Cost (VC)

(FC) (VC)
1000

Total production Total production

(Q) (Q)
• e.g: insurance, taxes on • e.g: cost of material
facilities, general management, • VC increase when output
fixed salaries labor, rent increase
• Even kuantiti output 0, firma
masih menangung beban kos
tetap
⚫ Incremental cost (Kos tambahan): additional cost resulting
from increasing output of a system by one (or more) units
(peningkatan jumlah kos yang disebabkan oleh
peningkatan pengeluaran atau aktiviti lain.)

⚫ Contohnya, jika jumlah kos syarikat meningkat daripada

RM 320,000 hingga RM 360,000 hasil daripada
peningkatan jam mesinnya dari 8,000 hingga 10,000, kos
tambahan sebanyak 2,000 jam mesin ialah RM 40,000.
Costs can be categorized in several different ways…
⚫ Direct cost (Kos langsung): can be measured and allocated to a
specific work activity; labor and material cost (senang dinilai)
direct labor, direct materials, commissions,

⚫ Indirect cost (Kos tidak langsung): difficult to attribute or allocate

to a specific output or work activity :salaries, quality control
costs, insurance,

⚫ Standard cost: cost per unit of output, established in advance of

production or service delivery
(kos seunit pengeluaran yang dirancang sebelum pengeluaran.
Ditetapkan berdasarkan kos buruh dan kos bahan)
We need to use common cost terminology...

⚫ Cash cost (kos tunai): a cost that involves a payment

of cash.

⚫ Book cost : a cost that does not involve a cash

transaction but is reflected in the accounting system
(merekod penerimaan dan pembayaran).
 We need to use common cost terminology...
⚫ Sunk cost: a cost that has occurred in the past and has no relevance
to estimates of future costs and revenues related to an alternative
course of action (Sullivan et al., 2012)
Kos hangus: Kos pada masa lepas. Ia tidak boleh diambil kira
dalam membuat keputusan pada masa hadapan (Rosnah, 2007)

Contoh:
Tempahan Kereta (Model A) - anda membayar RM 1,000. Kereta
dijangka diterima dlm tempoh 7 bulan.
Selepas 3 bulan, Model B dilancarkan - ciri lebih baik.
Jika anda membatalkan tempahan Model A, wang pendahuluan
RM 1,000 dikira sebagai “kos hangus”.
 More common cost terminology…

⚫ Opportunity cost: the monetary advantage foregone due to limited

resources. The cost of the best rejected opportunity (Sullivan et.
al., 2012)

Kos lepas barang (kos melepas): memiliki sesuatu barangan di

mana barangan lain terpaksa dilepaskan (Rosnah, 2007)

Contoh:
Anda hanya ada RM50 (kewangan terhad)
Anda ingin membeli baju dan buku, masing-masing berharga
RM50. Jika anda memilih buku, maka baju perlu dilepaskan.
Oleh itu, “kos lepas sebuah buku ialah sehelai baju”.
 More common cost terminology…

⚫ Explicit cost (Kos nampak/langsung):

Jumlah wang yang dibelanjakan oleh pengeluar dalam proses
pengeluaran produk / perkhidmatan
Contoh: bayaran gaji, sewa, insuran, iklan & promosi.

⚫ Impilicit cost (Kos tak nampak):

Kos pengeluar dalam proses pengeluaran produk / perkhidmatan
menggunakan input sedia ada.
(Iaitu, bayaran yang akan diperoleh jika pengeluar menjalankan
pekerjaan lain)
Contoh :
Petani sekeluarga menguruskan sawah padi sendiri (menggunakan tenaga
dan alatan sendiri).
Kos implisit ialah gaji petani, isteri dan anak-anak yang akan diperoleh jika
masing-masing bekerja dengan majikan lain.
 Classify items as FC or VC

1. Raw materials VARIABLE COST

2. Direct labour VARIABLE COST
3. Utilities VARIABLE COST @ FIXED
4. Property Taxes FIXED
5. Administrative salaries FIXED
6. Payroll taxes VARIABLE COST @ FIXED
7. Insurance-building FIXED
8. Clerical Salaries FIXED
9. Sales Commission VARIABLE COST
10. Rent FIXED
11. Interest on Borrowed
Money FIXED
Answer
 Example of Final Exam

Classify each of the following cost items as either fixed or variable cost;

1. General Manager car

FC
2. Water for car wash shop
VC
3. Executive salaries
FC
4. Electricity for the machinery in production floor
VC
5. Air-conditioning for the clean room in production floor
VC
6. Operation and maintenance of building
FC
 Example

⚫ You have been invited by friends to fly to Germany

for Octoberfest next year. For international travel,
you apply for a passport that costs RM350 and is
valid for 5 years. After you receive your passport,
your travel companions decide to cancel the trip
because of “insufficient funds.” You decide to also
cancel your travel plans because traveling alone is no
fun. Is your passport expense a sunk cost or an
opportunity cost? Explain your answer.
 Example

⚫ You have been invited by friends to fly to Germany for

Octoberfest next year. For international travel, you apply
for a passport that costs RM350 and is valid for 5 years.
After you receive your passport, your travel companions
decide to cancel the trip because of “insufficient funds.” You
decide to also cancel your travel plans because traveling
alone is no fun. Is your passport expense a sunk cost or an
opportunity cost? Explain your answer.

⚫ Answer: The RM350 you spent on a passport is a sunk cost

because you cannot get your money back.
 Example

⚫ Suppose you are invited to a party on a night you are

scheduled to work. If you work, you will earn RM10 per
hour for eight hours, or a total of RM80. Determine the
opportunity cost if you choose to go to the party?
 Example

⚫ Suppose you are invited to a party on a night you are

scheduled to work. If you work, you will earn RM10 per
hour for eight hours, or a total of RM80. Determine the
opportunity cost if you choose to go to the party?

⚫ Answer: If you choose to attend the party, your opportunity

cost is RM80 due to you give up the right to earn the
RM80.
 More common cost terminology…

⚫ Life-cycle cost LCC:

the summation of all costs related to a product, structure, system, or service
during its life span.
⚫ Kos Kitaran Hayat:
semua kos yang wujud sepanjang hayat item meliputi kos mereka bentuk,kos
binaan, kos pengujian, kos penyelengaraan dan kos pelupusan
⚫ Terdapat 2 fasa; fasa perolehan dan fasa operasi
⚫ Pemilihan reka bentuk yg betul dapat minimumkan kos senggaraan
 Life-cycle cost LCC

100

75
% kos terlibat

Masa dan aktiviti

Operasi
Mengenal Perincian rekabentuk dan Pengelua dan
senggara Lupus
pasti pembangunan ran

FASA PEROLEHAN FASA OPERASI

Life-cycle cost LCC (W.G. Sullivan)
 Jenis kos dalam LCC
Investment cost (Kos Permulaan)
Kos menjalankan aktiviti dalam fasa perolehan.
Ia dilaburkan sekali sahaja (tidak berulang)
Dikenali juga sebagai kos pelaburan dan pelaburan modal.
Pembelian mesin – kos asas mesin, pengangkutan, latihan,
pemasangan, alatan sokongan (komputer, automasi dll).

Maintenance cost (Kos Operasi dan Senggaraan)

Kos menjalankan aktiviti dalam fasa operasi.
Ia berulang-ulang dalam mengendali / menyelenggara mesin.
Terdiri daripada :
Kos tetap : kos pentadbiran, buruh tak langsung, insuran …
Kos berulang : Kos bahan langsung, buruh langsung, alat ganti

Disposal cost (Kos Pelupusan)

Kos bagi aktiviti pelupusan aset / item.
Ia dibelanjakan sekali sahaja seperti pengangkutan, bahan dan buruh terlibat
dalam melupus aset.
 Fixed Cost, Variable Costs and Total Costs

⚫ For cost analysis, the Total Cost (TC) are:

Total Cost = FC + VC(Q)

FC = Fixed Cost (tidak dipengaruhi

kuantiti)
VC = Variable Cost per unit
Q = Quantity/volume of output
Example 1 :

Production of 1 kg kopi requires the variable cost=RM5 and

Fixed cost for a day= RM300.
a) Develop the linear equation for production of 1kg kopi.
b) Determine the total cost of 1,000 kg kopi for a day.

Solution:
a) Given FC = RM300 / day, VC = RM5 / kg
∴ Total cost, TC = F + VQ = 300 + 5Q

b) For 1,000 kg kopi,

TC = (300/day)(1 day) + (5 /kg) x (1000 kg/day)(1 day)
= 300 + 5(1000)
= RM 5,300
 Contoh 2 :
Cost to produce 10 pcs of T-shirts= RM 350, dan
Cost to produce 20 pcs of T-shirts = RM 600
a) Develop the linear equation for production of Tshirt.

Solution:
a) Equation of cost, TC = FC+ VC (Q)

(1) } Q1 = 10, TC1 = 350 ; 350 = FC + 10VC --------(i)

(2) } Q2 = 20, TC2 = 600 ; 600 = FC + 20VC --------(ii)

VC ; (ii) – (i) } 250 = 10VC, ∴VC = 25

FC ; VC = 25, (i) } 350 = FC + 25(10)

FC= 100

Linear equation, TC = 100 + 25Q

 Example 3

⚫ Haslina plan to buy a car. She has three choices. estimating

the distance travelled by car is 2500km per month and the
cost of petrol is RM1.92 / litter. Based on monthly cost,
determine the most economical car.

Types of car
A B C
Fixed cost/month RM400 RM325 RM600
Petrol usage (km/litre) 30 25 36
Maintenance cost 0.15 0.20 0.12
(RM/km)
 Example 3

⚫ For each car, determine the VC and MC for a month.

⚫ Car A
30 km= 1 litre. 2500 km= 83 litre
VC= 83 litre x RM 1.92/litre = RM 160
MC = RM 0.15/ km x 2500 km = RM 375
So, the total cost for CAR A is
= RM400 + RM 160 + RM 375 = RM 935.
⚫ Car B, Total cost = RM 873
⚫ Car C, total cost = RM 969
Calculation of Profit and Break Even point

Total revenue= jualan hasil

P = price/unit
Q = quantity/unit
 Profi
t TR

BEP TC
Lost
Cost
VC

FC

Q
0 Quantity
TR > TC = profit
TR < TC = lost
Pada Q0, TR =TC --- berada pada titik break even point
(pulang modal)
Example 3 :
Based on Example 1,
Linear equation is, TC = 300 + 5Q
If the kopi is sell for RM10 per Kg.
a) Determine the break even point (BEP).
b) The profit if the company sells the kopi:
(i) 100 Kg /day (ii) 50 Kg/day

Solution:
a) From Eg 1: TC = 300 + 5Q
Note that BEP , (TR) = (TC),
TR = Price /unit (P) x Quantity (Q) = 10Q
∴ 10Q = 300 + 5Q
Q = 60 (Pada titik pulang modal, kuantiti keluaran ialah 60 kg sehari)
b) Profit = TR – TC
(i) = 10(100) – (300 + 5(100)) = RM200 (profit)
(ii) = 10(50) – (300 + 5(50)) = RM-50 (loss)
Example 4 :

Assume the total cost(TC) to produce x unit product A is:

TC=300+2.5x.

a) If every product sold at a price of RM4, calculate the breakeven

point.
b) If the price of the product increases to RM5 / unit. What is the new
break even point
c) If at least 150 unit of product is sold every day, what is the
price/unit to get profit?
 Exercise 1

Cell phone company has a fixed cost of RM 1,000,000 per month and a
variable cost of RM20 per month per subscriber. The company charges
RM29.95 per month to its cell phone customers.

a) What is the breakeven point for this company?

b) The company currently has 85,000 subscribers and proposes to raise

its monthly fees to RM39.95 to cover add-on features such as text
messaging, song downloads, game playing, and video watching. What
is the new breakeven point if the variable cost increases to RM25 per
customer per month?

c) If 10,000 subscribers will drop their service because of the monthly

fee increase in Part (b), will the company still be profitable?
 Exercise 1

⚫ a)Breakeven point = 100,503 customers per month

⚫ b)New breakeven point = 66,890 per month

⚫ c)Profit.
⚫ For 75,000 subscribers per month, more than new BEP.
⚫ profit equals: = RM 121,250 per month. This
improves on the monthly loss experienced in part (a).
 Exercise 2

A company has fixed costs of RM20,000 in order to

sell a product that costs them RM50 per unit. If a
company sells the product for RM120 per unit:
a. Determine the break-even units
b. Determine the units required to produce
RM100,000 in profit?
 Exercise

Pepsi Company produces a single article. Following

cost data is given about its product:‐
Selling price per unit RM40
Marginal cost per unit RM24
Fixed cost per annum RM 16000
Calculate:
(a) break even sales
(b) sales to earn a profit of RM 2,000
(c) Profit at sales of RM60,000
(d) New break even sales, if price is reduced by 10%.
Indira Industries is a major producer of diverter dampers used in the gas
turbine power industry to divert gas exhausts from the turbine to a side
stack, thus reducing the noise to acceptable levels for human
environments. Normal production level is 60 diverter systems per month,
but due to significantly improved economic conditions in Asia, production
is at 72 per month. The following information is available in Table below;
Fixed Cost, FC RM 2.4 million per month
Variable Cost per unit, VC RM 35,000
Price per unit, P RM 75,000

1. How does the increased production level of 72 units per month

compare with the current breakeven point?
2. What is the current profit level per month for the facility?
3. What is the difference between the price and variable cost per damper
that is necessary to break even at a significantly reduced monthly
production level of 45 units, if fixed costs remain constant?
⚫ ABC Company is contemplating manufacturing a product
which can be sold for RM10 per unit on the market. It
knows of two production processes, between which it has to
choose one. The following data have been collected for Q =
150,000 units.
(a) Calculate the break-even point for each process.
(Q1= 85713.67) (Q2=68,181.82)

(b) Which process should be used if there was a high probability of

exceeding sales of 150,000 units? Why?
If sales are going to exceed 150,000 units, the firm should use process 1
because the average variable cost (assumed to be constant) for each unit
above 150,000 will be only $5.33 for process 1 but will be $6.33 for
process 2.

(c) Which process should be used if there was a high probability of selling
considerably less than 150,000 units? Why?
Process 2 should be used if the firm expects to operate below 150,000
units because the variable cost will fall more quickly with this process and
profits will decline less slowly than with process 1
 Answer

1. Book cost: cost effects from past decisions that are recorded in in the books
(accounting books). They are costs reflected in the accounting system only
2. Maintenance cost: includes many of the recurring annual expense items
associated with the operation phase of the life cycle
3. Recurring cost: Costs referring to any expense that is known, anticipated,
and occurs at regular intervals.
4. Investment cost: the capital required for most of the activities in the
acquisition phase.
5. Disposal cost: includes those nonrecurring costs of shutting down the
operation and the retirement and disposal of assets at the end of the life
cycle.
6. Fixed cost: remain constant over a wide range of activities
7. Indirect cost: vary in total with the volume of output
8. Incremental cost: the additional cost (or revenue) that results from
increasing the output of a system by one (or more) units.
 EXAMPLE

⚫ Cash cost-cost of the factory building

=RM300,000

⚫ Book cost-total decrease value

=RM 300,000-RM 230,000=RM70,000

⚫ Sunk cost-book value less sold prices

=RM 230,000-RM180,000=RM50,000

⚫ Opportunity cost-value of building sold

=RM 180,000

⚫ Standard cost-recution value of asset, fixed depreciation

=RM 70000