2. Introduction to Costing

Hanif KanjerDean, Rustomjee Business School

Classification of Costs

• Annual Fire-insurance policy cost

Direct Costs Indirect Costs

Variable Costs

FixedCosts

• Wages to temporary assembly line workers

• Cost of tyres used on Geoprism

• Freight Costs of Corrrolla engines shipped from Toyota City, Japan to Fremont, California

• Electricity costs for NUMMI plant

• Annual Awards for Corrolla suppliers

• Salary of Engineer who monitors design changes on Geo Prism

• Salary of Public Relations Manager

E.g.2-20, Page 79, Assembly of cars at New United Motor Manufacturing Inc. NUMMI, a jv between General Motors and ToyotaAssemble two types of cars: Corolla and GeoPrisms

Variable Costs, Fixed costs, Total Costs

Plan 1: $0.22/mile

Miles US$ 1,000 220 1,500 330 2,000 440 2,250 495

Plan 2: Fixed $200 for 1500 miles, and

$0.17/mileMiles US$1,000 200 1,500 200 2,000 285 2,250 583

Plan 3: Fixed $250 for 2000 miles, and $0.15/mile

Miles US$ 1,000 250 1,500 250 2,000 250 2,250 588

Variable Costs + Fixed costs = Total Costs

E.g. 2-21, Page 79Bernard Holmes pet transporter business. Choose between different van rental options.

Which Plan should Holmes choose to do 1,000 miles, 1,500 miles, and 2250 miles of driving?

Best Plan for 1000 miles Best Plan for 1500 milesBest Plan for 2250 miles

Decision-making, Total and Unit Costs - 1

Production Qty (units) 6000A metal worker can produce 5 corner posts per hour (units) 5

Number of hours required to produce the given quantity (Hrs) ??Wage rate per hour (US$) 25 Total Wages? ??Material costs per corner post (US$) 4 Total Materials cost? ??Fixed manufacturing costs per period (US$) 25,000 Period Non manufacturing Costs -Fixed (US$) 7,500 Quantity sold (units) 6,000 Total Costs (US$) ??Unit costs (US$) ??

E.g. 2-27, Page 81,

Decision-making, Total and Unit Costs - 2

Production Qty (units) 6,000 A metal worker can produce 5 corner posts per hour (units) 5

Number of hours required to produce the given quantity (Total Hrs = 6000/5) 1,200

Total Costs (US$)

Wage rate per hour (US$) (Total wages =1200*25 = 30,000)

25 30,000

Material costs per corner post (US$) (Total materials = 4*6000 = 24,000)

4 24,000

Fixed manufacturing costs per period (US$) 25,000 25,000 Period Non manufacturing Costs -Fixed (US$) 7,500 7,500 Quantity sold (units) 6,000 Total Costs (US$) 86,500 Unit costs (US$) 14.42

E.g. 2-27, Page 81,

Decision-making, Total and Unit Costs - 3

Production Qty (units) 6,000 7,000 A metal worker can produce 5 corner posts per hour (units) 5

Number of hours required to produce the given quantity (Hrs) 1,200 1,400

Wage rate per hour (US$)Total Wages (US$)

25 30,000 35,000

Material costs per corner post (US$)Total Material Costs (US$)

4 24,000 28,000

Fixed manufacturing costs per period (US$) 25,000 25,000 25,000 Period Non manufacturing Costs -Fixed (US$) 7,500 7,500 7,500 Quantity sold (units) 6,000 Total Costs (US$) 86,500 95,500 Unit costs (US$) 14.42 13.64

E.g. 2-27, Page 81,

Unit Costs - CautionMay 2009 June 2009

Production Qty (units) 6,000 7,000 A metal worker can produce 5 corner posts/hour , Total Hours 5 1,200 1,400 Wage rate per hour (US$), Total Wages (US$) 25 30,000 35,000 Material costs per corner post (US$), Total Material Costs (US$) 4 24,000 28,000 Fixed manufacturing costs per period (US$) 25,000 25,000 25,000 Period Non manufacturing Costs -Fixed (US$) 7,500 7,500 7,500 Total Costs (US$) 86,500 95,500 Unit costs (US$) 14.42 13.64 Budgeting Costs for June 2009, based on Unit costs of May 2009Unit Cost of May 2009* Production Qty for June 2009Budgeted costs for June 2009 = (7000*14.42) 100,940Actual Costs for June 2009 = 95,500Overbudgeting Costs by 5,440

Significance of Unit Costs versus Total Cost

As quantity produced increases, the fixed costs are divided over a larger production quantity, and hence unit costs would go down.

• DV: a,g,e• IV: h,c• DF: d• IF: b,f