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A fixed cost is any expense that remains constant regardless of the level of output. No cost is truly fixed. Many types of expense are virtually fixed over a wide range of output
-rent, property taxes, most depreciation, insurance payments |
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Term
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Variable costs are expenses that fluctuate directly with changes in the level of output.
Example- each additional item produced requires a specific amount of material and labor. The incremental cost of this additional meterial and labor can be isolated and assigned to each unit.
-Many overhead expenses are also variable because utility bills, maintenance expense, etc vary with the production level |
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| Sunk costs are past expenses or investments that have no salvage value and therefore should not be taken into account in considering investment alternatives. They also could be current costs that are essentially fixed such as rent on a building. You pay rent on a building. The rent is sunk; that is, it continues to exist and does not change in amount regardless of the decision. |
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| Opportunity cost is the benefit forgone, or advantage lost, that results from choosing one action over the best-known alternative course of action |
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| Avoidable costs include any expense that is not incurred if an investment is made but that must be incurred if the investment is not made. Avoidable costs are an example of how it is possible to "save" money by spending money |
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| The economic life of a machine is the period over which it provides teh best method for performing its task. When a superior method is developed, the machine has become obsolete. |
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Definition
A method for allocating costs of capital equipment. The value of any capital asset decreases as its useful life is expended.
-refers to the allocation of cost due to the physical or functional deterioration of tangible assets such as buildings or equipment |
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Definition
| Refers to the allocation of cost over the useful life of intangible assets such as patents, leases, franchises, and goodwill. |
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| Straight-Line Depreciation |
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Definition
The asset's value is reduced in uniform annual amounts over its estimated useful life.
Annual amount to be depreciated = (cost-salvage value)/Estimated useful life |
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Definition
Investment cost - depreciation allocations
-used in accounting to reflect the value at a period after deducting depreciation from prior periods |
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Term
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Definition
a collection of mathematical techniques that simplify economic comparisons
-provides a rational and systematic approach for evaluating different economic decisions. Used in:
-purchasing a new manufacturing equip
-evaluating different manufacturing methods in terms of econ. value to the company
-placing existing manufacturing equipment or methods |
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| Alternative evaluation variables |
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Definition
-initial cost, interest rate, rate of return
-economic life
-annual maintenance/operating cost or benefit
-resale or salvage value |
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| Basis of Alternative Evaluation |
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Definition
Money is the general basis. Pick the alternative with the lowest overall cost.
-intangible factors must be considered (effect of process changes, human factors) |
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Definition
| The change in the amount of money due to the impact of interest or cost of money over time |
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Definition
Simple interest is calculated using the principal only- ignore any interest that was accrued in preceding interest periods
Interest*time*amount borrowed |
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Definition
| the interest for a period is calculated on the principal plus the total interest accumulated in previous periods |
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| The basis for engineering economy analysis. It is the combination of time value of money and interest rate. It means that different sums of money at different times can be equal in economic value. |
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Term
| Engineering Economy Variables |
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Definition
P = sum/value at time denoted as the present
F = sum at some future time
A = equal amounts of money at certain periods
n = # of interest periods
i = interest rate per interest period |
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