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COST TIME ANALYSIS, DEPRECIATION

AND BREAKEVEN COST ANALYSIS

RUKSARDEEP KAUR
1346461

SUBJECT INCHARGE
AR. MONA SOOD
TIME-COST ANALYSIS

􀂾 Duration and cost of activity depends on the amount an type of resources used
􀂾 Assuming more workers will normally reduce time and will change its cost
􀂾 This relationship between activity time and cost called time-cost Trade off

Why do we need to reduce project time?


􀂾 Finish the project in a predefined deadline date
􀂾 Recover early delays to avoid liquidated damages
􀂾 Free key resources early for other projects
􀂾 Avoid adverse weather conditions that might affect productivity
􀂾 Receive an early completion-bonus
􀂾 Improve project cash flow

What is the way to reduce activity duration?


􀂾 Working extended hours (Over time)
􀂾 Offering incentive payments to increase the productivity
􀂾 Using additional resources
􀂾 Using materials with faster installation methods
􀂾 Using alternate construction methods or sequence
TIME-COST ANALYSIS
Activity Time-Cost Relationship
􀂾 Decreasing activity duration will increase its cost

􀂾 For simplicity, linear relationship is adopted


TIME-COST ANALYSIS

IMPORTANCE OF TIME-COST ANALYSJS

The main objective of network planning is to complete the job within the stipulated time and at minimum overall cost. At times it
becomes necessary lo accelerate the completion of work. This can be made possible only by reducing the duration of critical
activities. The duration of critical activities can be reduced by the deployment of additional resources e.g. additional labour,
shuttering, centring etc. While exploring the possibility of accelerating project completion by deploying additional resources on
critical activities, the following questions merit careful consideration:
• To what extent can the project duration be reduced?
• What is the lowest cost for reducing the project duration to the specified date?
• What is the project duration for which the total project cost is the lowest?

Project cost depends upon the time available for completing the work and the time in which a project may be completed depends
upon the cost that the owner is prepared to bear. Cost and time being inter-related, a scientific analysis of project cost for different
time periods of completion assumes paramount importance in project planning and implementation .

PROJECT COST

The project cost can be broadly divided into (i) direct cost and (ii) indirect cost.
(i) Direct cost: Direct cost consists of expenditures which are directly
chargeable to and can be identified specifically with the activities of the project e-.g. material cost and labour cost.
(ii) Indirect cost: Indirect cost consists of expenditures which cannot be dearly allocated to individual activities of the project e.g.
establishment charges, insurance charges, administration charges etc.
TIME-COST ANALYSIS
VARIATION OF DIRECT COST WITH TIME

In order to understand the variation of direct cost with time, consider the excavation for a manhole of 1metreouter diameter. It
is assumed that only one labourer at a time can work to excavate the soil and the total excavation can be completed in 6 days
i.e.48 man-hours. The excavation maybe completed in any one of the following ways:
(i) 1man working 1shifts/day for 6 days
@ Rs. 40/- per day - Rs.240
(ii) 2 men working 2 shift/day for 3 days Premium for 2nd shift Rs. 20/-
lst day Rs.40 + 60 ·= Rs. 100
(8 Hrs + 8Hrs)
2nd day Rs.40 + 60 = Rs. 100
(8 Hrs + 8 Hrs)
3rd day Rs.40 + 60 = Rs. 100
(8Hrs + 8 Hrs)
Rs. 300 = Rs.300

(iii) 3men working 3shifts/day for 2 days Premium for 2nd and 3rd shifts Rs.20/-and Rs.30/- respectively
1st day Rs.40 + 60 + 70 - Rs.170
(8 Hrs + 8 Hrs. + 8Hrs)
2nd day Rs. 40 + 60 + 70 - Rs. 170
(8 Hrs. + 8 Hrs. + 8 Hrs)
Rs.340 - Rs. 340
TIME-COST ANALYSIS

(iv) Any number of men working but duration cannot be reduced beyond 2 days
= Cost rises steeply with increase in the number of persons

(v) 1man working for say 6 days due to inefficiency or lack of supervision etc.
@ Rs.40/- per day
= Rs.250

When the direct costs corresponding 10 various durations arc plotted, a graph shown in Fig. 6.1 represents the variation of direct cost
with time.

Normal Time (Tn):Itis time for performing an activity with the normally
available resources.
Normal Cost (Cn): It is the minimum direct cost when the activity is performed
in normal time duration.
Crash Time (Tc): It is the minimum time in which an activity can be
performed.
Crash Cost (Cc): It is the direct cost corresponding to the crash time.

Cost Slope =Crash Cost (Cc) - Normal Cost (Cn)


Normal Time (Tn) - Crash Time (Tc)
=Difference between Crash and Normal Cost
Difference between Normal and Crash Time
TIME-COST ANALYSIS
For simplicity, a linear relationship between time and direct cost is assumed.
The direct cost-time curve has the following characteristics:
• There is a normal duration al which the direct cost is the minimum;
• The direct cost increases as the duration increases beyond the normal time;

PROCEDURE FOR SHORTENING PROJECT DURATION


• Start by shortening the activity duration on the critical path which has the least cost slope and not been shortened to its crash
duration.
• Reduce the duration of the critical activities with least cost slope until its crash duration is reached or until the critical path
changes.
• When multiple critical paths are involved, the activity(ies) to be shorten is determined by comparing the cost slope of the
activity which lies on all critical paths (if any)
• Having shortened a critical path, you should adjust activities timings, and floats.
• The cost increase due to activity shortening is calculated as the cost slope multiplied by the time of time units shortened.
• Continue until no further shortening is possible, and then the crash point is reached.
• The results may be represented graphically by plotting project completion time against cumulative cost increase.
BREAK EVEN COST ANALYSIS

Used for business enterprise Used for engineering decision


(units-costs-revenue relationships) (selection of various alternatives)

BREAK EVEN ANALYSIS FOR BUSINESS ENTERPRISE

Break Even Analysis implies that at some point in the business operations, total revenue equals total cost. Basically, Break Even
Analysis is concerned with finding the point at which revenue and cost agree exactly. hence the term Breakeven (point).The Break
Even Point is therefore the volume of output at which neither a profit nor a loss is incurred. If the production rate is greater than that
of the break even point (BEP),a profit will result. When the rate is less than that of the (BEP), a loss will be sustained. By representing
the revenue and costs of a business in the form of chart as shown in Fig. 5.19, we can easily determine the possibility of profit for any
rate of production.

BREAK EVEN CHART


A breakeven chart is a graphical representation (Fig. 5.19) of relationship between costs and revenue for all possible
volumes of outputs. The main objective of the graphic device is to determine the break point and profit potential under varying
conditions of output and costs. In brief it may be called a continuous income (profit and loss) statements.
BREAK EVEN COST ANALYSIS
CONSTRUCTION OF BREAK EVEN CHART

Figure portrays a break even chart which consists Y-axis representing a scale
of rupees against which the fixed cost, variable cost and revenue can be
measured. The X-axis can be dimensioned in terms of production units or
turnover i.e. the total sale of enterprise. The line FF represents the fixed costs
of production which is independent of output units. The line FV shows
variable cost which varies linearly with the volume of production and it r
presents the total cost which result from the summation of fixed and variable
cost. The variable cost is the ordinate between FF and FV. Line OS is the
revenue line and linear relationship is utilised to describe the total sales. The
point at which to line is known as BEP (Break Even Point). BEP can be
described in the forms of output units or turnover of that output units. The
horizontal line (or the distance) between BEP and output being produced is
called margin of safety, and it expressed as percentage of total turnover. If
this distance is large, it indicate that profits will be there even if there is drop
in production because of some unavoidable be there even if there is a drop
line and total cost line at BEP is called angle of incidence. The angle
between sale is large, rate of profit will be high.
For the most favourable position in business margin of safety should be as
high as possible.
BREAK EVEN COST ANALYSIS
THE VARIOUS FUNCTIONS OF BREAK EVEN CHART ARE:

i) It is a important tool of business management and it gives crystal clear view of the position of a business.
ii) BEP of the chart marks clearly no profit no loss situation.
iii) It is useful in understanding the effects of variations of fixed cost, variable cost and revenue on the profitability of a business. So
it is used to portray the effects of proposed changes in operational policy.
iv) Angle of incidence and margin of safety indicates the business position whether favourable or unfavourable.
v) It indicates likely profit or losses at various outputs levels.
vi) It is a decision making tool in the hands of management.

LIMITATIONS OF BREAK EVEN CHART

i) When the market conditions may not remain constant over the range of projected capacity it becomes difficult to classify the costs as
fixed or variable, the BEP may not portray the true picture.
ii) The break even chart is a tool for a short run analysis.
iii) The total cost line (sum of variable cost and fixed cost) need not be straight line. In actual practice, costs does not vary in direct
proportion.
iv) The revenue line may be so straight.
v) It represents a static picture whereas business operations are very much dynamic.
vi) Analysis of break evenchart products present additional difficulty when company produces a variety of products.
DEPRECIATION
Depreciation is defined as the loss in value of an asset with the passage of time. This loss must be realized during thelife of asset with
reasonable amount of profit on it. A reserve fund should be created to realise the cost of asset at the end of its life and it must not be
confused with the profit. The main purpose of the depreciation.is to provide for the recovery of capital that has been involved in the
possession of the physical property.

TYPES OF DEPRECIATION
A common classification of depreciation is
a) Physical depreciation
b) Functional depreciation
c) Contingent depreciation.

PHYSICAL DEPRECIATION
Depreciation resulting in physical impairment of an asset is known as physical depreciation . This results in lowering the ability of asset to
render its intended service. The primary cause of physical depreciation is
wear and tear because of its instant use such as abrasion, shocks, vibration, impact etc. and the deterioration due to action of elements
such as corrosion of pipe, chemical decomposition.
FUNCTIONAL DEPRECIATION
Functional depreciation often called OBSOLESCENE is defined as loss in the value of the property due to change in fashion, design or
structure or due to inadequacy to meet
the growing demand, necessity for replacement due to new invention being more economical and more efficient etc.
CONTINGENT DEPRECIATION
i) accidents (due to negligence) iii)diminution of supply
ii)diseases (pollution of water, parasites) (natural gas, electricity, water etc.)
DEPRECIATION

DIFFERENCE BETWEEN DEPRECIATION AND OBSOLESCENCE


DEPRECIATION

METHODS OF CALCULATING DEPRECIATION


■ Straight line method
■ Constant percentage method
■ Sinking fund method
■ Quantity survey method

STRAIGHT LINE METHOD


■ In this method it is assumed that the property loses its value by the same amount every year. A fixed amount of the original cost
is deducted every year so that at the end of the utility period only the scrap value is left.
■ D =C−S
n
D = Annual depreciation
C = original cost
S = scrap value
N = life in year
■ Depreciation of the property after m years
=C − S × m = m × D
n
■ Book value after m years
=C−C−s ×m=C−m×D
n
DEPRECIATION

CONSTANT PERCENTAGE METHOD


■ In this method it is assumed that the property will lose its value by a constant percentage of tis value at the beginning of
every year.

p=1−

p = percentage rate of annual depreciation


S = scrap value
C = original cost
n = life of years

SINKING FUND METHOD


■ In this method the depreciation of the property is assumed to be equal to the annual sinking fund plus the interest on the
sinking fund for that year.
■ A= Annual sinking fund
■ b,c,d,…etc. = interest on the sinking fund for the subsequent years.
■ C= original cost
DEPRECIATION

If i is the rate of interest, annual sinking fund installment to accumulate 1 Rs. In n years.

p=

If i is the rate of interest and 1 Rs. Is deposited every year total sinking fund
accumulated at the end of n years is

q=

Rate of depreciation in n years


= (p×q)%
DEPRECIATION

The cost of newly constructed building was Rs. 150000. the life of building is 75 years. Determine the depreciation in the 30th year
of life by straight line method, constant % method, and sinking fund method at the 8% compound interest. The scarp value of
building is 10% of its construction cost.
DEPRECIATION
TIME-COST ANALYSIS
EXAMPLE APPLICATION
• Consider the following project
• Indirect cost LE 125/day
• Crash to 49 days