1. Cost Analysis
Mohammad Arief

2. Overview Economic Scale Opportunity Cost Concept COST
Competitors arise that produce at lower costs
Overview
Firms that are satisfied with the status quo.
Economic Scale
Drive them out of business
The advantages of a large firm have NOT provided the advantages of flexibility and agility found in some smaller companies
Operations Activity.
Opportunity Cost Concept
COST
Attracting a resource from its best alternative
Cost analysis is helpful in the task of finding lower cost methods to produce goods and services
Managers seek to produce the highest quality products at the lowest possible cost.

3. Meaning and Measurement of Costs
In elementary form
COST
Refers to the exchange or transformation of resources takes place.
Opportunity
Economics cost
Cost Information

4. Accounting vs Economic Cost
Accounting costs involve explicit historical costs. They attempt to use the same rules for different firms, so we can compare firm performance.
Economic costs are based on making decisions. These costs can be both implicit and explicit.
A chief example is that economic costs include the opportunity costs of owner-supplied resources such as time and money, which are implicit costs.
Economic Profit = the difference between total revenues and these total economic costs, implicit opportunity costs as well as explicit outlays.
Total Revenues - Explicit Costs - Implicit Costs
Both explicit and implicit costs make economic profit lower than accounting profit

5. Contrasts between Accounting and Economic Costs
Depreciation Cost Measurement.
Accounting depreciation (e.g., straight-line depreciation) tends to have little relationship to the actual loss of value
To an economist, the actual loss of value is the true cost of using machinery
Inventory Valuation.
Accounting valuation depends on its acquisition cost
Economists view the cost of inventory as the cost of replacement
Unutilized Facilities.
Empty space may appear to have "no cost”
Economists view its alternative use (e.g., rental value) as its opportunity cost
Sunk Costs.
Already paid for, or there already exists a contractual obligation to pay

6. SHORT-RUN COST FUNCTIONS
To measuring the costs of producing a given quantity of output, economists are also concerned with determining the behavior of costs when output is varied over a range of possible values.
Cost Function
Fixed Cost
TC = FC + VC
Variable Cost
The costs of all the inputs to the production process that are fixed or constant over the short run
Consist of the costs of all the variable inputs to the production process

7. Short-Run Cost Graphs 3. 1. 2. MC intersects lowest point
ATC 3. 1.
AVC
AFC
AFC Q Q
MC intersects lowest point
of AVC and lowest point of
ATC.
When MC < AVC, AVC declines
When MC > AVC, AVC rises 2.
AVC Q 7

8. Relationships Among Cost & Production Functions When Factor Markets Are Perfectly CompetitiveQ
AP & AVC are inversely related. (ex: one input)
AVC = WL /Q = W/ (Q/L) = W/ APL
As APL rises, AVC falls
prod. functions AP
MPL L
cost
MP and MC are inversely related
MC = dTC/dQ = W dL/dQ = W / (dQ/dL) = W / MPL
As MPL declines, MC rises
AVC MC
cost functions Q 8

9. LONG-RUN COST FUNCTIONS
Over the long-run planning horizon, using the available production methods and technology, the firm can choose the plant size, types and sizes of equipment, labor skills, and raw materials that, when combined, yield the lowest cost of producing the desired amount of output.
Optimal Capacity Utilization
Optimal output for a given plant size
Optimal plant size for a given output rate
Optimal plant size
Short-run concept of capacity utilization
Reduced average total cost of any given output
Will further opportunities for cost reduction cease

10. ECONOMIES AND DISECONOMIES OF SCALE
Refer the condition whereas the proportionally output more faster than input.
Economic Scale
Technology
Finance
Factors
Operating Scales increase
Specialization
Productive mechines
A firm size increase
Obligation offering
Bank loan
Bigger transaction (buying or selling the product)

11. Product-level economies Plant-level economies
Which include specialization and learning curve effects
Product-level economies
Such as economies in overhead, required reserves, investment, or interactions among products (economies of scope).
Firm-level economies
Economic Scale
Which are economies in distribution and transportation of a geographically dispersed firm, marketing, sales promotion, or R&D of multi-product firms
Plant-level economies

12. Diseconomic Scale
Rising long-run average costs at higher rates of throughput are attributed.
Factors
Individual production plant is transportation costs
Labor requirements
Higher wage rates
Relocation programs may be required to attract the necessary personnel
Large-scale plants are often inflexible operations designed for long production runs of one product, based often on forecasts of what the target market wanted in the past