COST ANALYSIS

Presented By, Priyanka yadu Sweta Rani, Rashi Chitkariya, Pratik Mahapatra Ayan Chakraborty
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Cost Analysis

IIPM What is Cost Function?

Economics

Cost Function And Its Specification

The cost of the farm gives us the functional relationship between total cost and total output. If C represents total cost and Q represents level of output, then the cost function can be written as C = C (Q). The cost function gives the minimum cost of producing different output levels.

Types of Costs:
i) Fixed Cost : These are the costs that the farm has to pay independently whether its operating or not. Example : Land, Machinery, Rent on building. ii) Variable Cost: These are the costs come from the inputs that the farm uses in its production process, e.g. the wages paid to workers. iii) Total Costs: These are the sum of fixed & variable costs.

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Cost Analysis

IIPM
Fixed Cost & Variable Cost Diagram

Economics

Total Cost Variable Cost

Fixed Cost

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Cost/Volume/Profit Equation
Sales = Sales cost + Labor cost + OH +
$325,000 = $108,875 + $81,250 + $97,500 +

Profit
$37,375

S = VC + FC + P VC = Food & Beverage Cost + Variable LC (40% Total Labor) FC = Fixed LC ( 60% Total Labor) + Overhead S ($325,000) = VC ($141,375) + FC ($146,250) + Profit ($37,375)
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Cost Analysis

IIPM

Economics

ECONOMIES OF SCALE
Refers to the cost advantages that a business obtains due to expansion Common sources are purchasing(bulk-buying through long term contracts), managerial(increasing the specialization of managers), financial(obtaining lower interest rates when burrowing and having greater financial sources at hand), marketing(promoting through wide range of media markets), and technological(taking advantage of returns to scale in production) Each factor reduces the long-run average costs by shifting the short-run average costs of production

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as quantity decreases from Q to Q2, average Cost decreases from C to C1

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DISECONOMIES OF SCALE
Disadvantages that arise due to expansion of production scale and lead to rise in cost of production INTERNAL DISECONOMIES: Managerial Inefficiency: with fast production scale, personal contacts between owners and managers and managers and labours get rapidly reduced Labour Inefficiency: increase in the number of workers encourages labour union activities which means loss of output per unit of time, thus rise in cost of production EXTERNAL DISECONOMIES: originate outside the firms, in input markets and due to natural constraints on expansion, discounts and concessions on bulk purchases come to an end increasing demand for inputs pressurizes input markets and input prices rise, causing rise in production costs

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ECONOMIES OF SCOPE
Conceptually similar to economies of scale Economics of scale refers to decreasing cost of production of a single product type, while economics of scope is for two or more products Makes product diversification efficient if they are based on common and recurrent use of proprietary knowhow Diseconomies of Scope: Multi-product production by a single firm that is less efficient than having separate firms each specializing in the production of a single product.

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EFFECT ON SMALL FIRMS

Small businesses face higher costs when they encounter government regulations as compared to larger firms A report titled The Impact of Regulatory Costs on Small Firms states that on a per employee basis it costs small firms $ 2,830 more than that of the larger firms Environmental regulations cost 364% less in larger firms Similarly, tax impliance costs 204% less

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COST BREAK-EVEN ANALYSIS

Determines how much sales volume your business needs in order to start making a profit Fixed Costs divided by (Revenue per unit Variable Cost per unit)

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