# Shared Flashcard Set

## Details

ECON 421 Part 1
Engineering Economics Test 1 Part 1
163
Mechanical Engineering
02/14/2011

Term
 Total Variable Costs (TVC)
Definition
 Total costs for variable factor inputs
Term
 Total Variable Costs (TVC)
Definition
 Varies with the amount of output produced
Term
 Total Variable Costs (TVC)
Definition
 Direct or unavoidable costs
Term
 Total Variable Costs (TVC)
Definition
 Unit factor cost times number of units used
Term
 Total Variable Costs (TVC)
Definition
 Those associated with operation that vary in total with the quantity of output or other measures of activity level
Term
 Total Variable Costs (TVC)
Definition
 Examples include: costs of material and labor used in a product or service because they vary in total with the number of output units—even though costs per unit remain the same
Term
 Recurring Costs
Definition
 repetitive and occur when a firm produces similar goods and services on a continuing basis
Term
 Variable
Definition
 ________ are recurring costs because they repeat with each unit of output
Term
 Recurring Cost
Definition
 A fixed cost that is paid on a repeatable basis is also a ______________
Term
 Nonrecurring Costs
Definition
 those that are not repetitive, even though the total expenditure may be cumulative over a relatively short period of time
Term
 Nonrecurring Costs
Definition
 Typically involve developing or establishing a capability or capacity to operate
Term
 Nonrecurring Costs
Definition
 Examples are purchase cost for real estate upon which a plant will be build, and the construction costs of the plant itself
Term
 Average Total Cost (ATC)
Definition
 Total cost divided by total output
Term
 Average Total Cost (ATC)
Definition
 TC/TP
Term
 Average Total Cost (ATC)
Definition
 AFC + AVC
Term
 Average Total Cost (ATC)
Definition
 TC/TP
Term
 TC/TP
Definition
 AFC+AVC=
Term
 AFC+AVC
Definition
 TC/TP=
Term
 Average Fixed Cost (AFC)
Definition
 Total fixed cost divided by total output
Term
 Average Fixed Cost (AFC)
Definition
 TFC/TP
Term
 Average Variable Cost (AVC)
Definition
 Total variable cost divided by total output
Term
 Average Variable Cost (AVC)
Definition
 TVC/TP
Term
 Marginal Cost
Definition
 incremental cost is included in it
Term
 Incremental Cost
Definition
 The additional cost that results from increasing the output of a system by one (or more) units
Term
 Incremental Cost
Definition
 Often associated with a “go/no go” decisions that involve a limited change in output or activity level
Term
 Marginal Cost
Definition
 Increase in total cost from the last unit produced
Term
 Marginal Cost
Definition
 ΔTC/ΔTP=ΔTC/MP
Term
 Indirect Costs
Definition
 Difficult to allocate a specific output or activity—costs of common tools, general supplies, and equipment maintenance
Term
 Direct Costs
Definition
 Can be reasonably measured and allocated to a specific output or work activity—labor and material directly allocated with a product, service or construction activity
Term
 Total Costs (TC)
Definition
 TFC + TVC
Term
Definition
 Common method of allocating costs among products, services and activities in proportion to the sum of direct labor and materials cost
Term
 Standard Costs
Definition
 Representative costs per unit of output that are established in advance of actual production and service delivery
Term
 Direct Labor
Definition
 Process routing sheets, standard times, standard labor rates
Term
 Direct Material
Definition
 Material quantities per unit, standard unit materials cost
Term
Definition
 Total factory overhead costs allocated based on prime costs
Term
 Total Product (TP)
Definition
 total amount produced in a given period
Term
 Average Product (AP)
Definition
 Total Product divided by number of variable factor input units used
Term
 Average Product (AP)
Definition
 TP/L=
Term
 Marginal Product (MP)
Definition
 The change in Total Product from use of one more variable factor input
Term
 Marginal Product (MP)
Definition
 Also known as Incremental Product
Term
 Marginal Product (MP)
Definition
 ΔTP/ΔL =
Term
 Total Costs (TC)
Definition
 the total cost of producing an output
Term
 Total Costs (TC)
Definition
 the sum of total fixed costs and total variable costs
Term
 Economics
Definition
 The study of how limited and scarce resources are chosen to satisfy unlimited human wants
Term
 Economics
Definition
 The study of how individuals and societies choose to use scarce resources that nature and previous generations have provided
Term
 Economics
Definition
Term
 Alfred Marshal
Definition
 the person came up with the definition "the study of man about the everyday business of life"
Term
 Land
Definition
 All gifts of nature, such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied to the production process
Term
 Labor
Definition
 The efforts, skills, and knowledge of people which are applied to the production process
Term
 Real Capital
Definition
 also known as Physical Capital
Term
 Real Capital
Definition
 Tools, buildings, machinery—things which have been produced which are used in further production
Term
 Financial Capital
Definition
 Assets and money which are used in the production process
Term
 Human Capital
Definition
 Education and training applied to labor in the production process
Term
 Entrepreneurship
Definition
 Human resource that organizes the other resources to produce goods and services
Term
 Entrepreneurship
Definition
 Humans that come up with new ideas about how to product; bear monetary, professional and reputation risk
Term
 Total Costs
Definition
 Sunk Costs + Opportunity Costs =
Term
 Sunk Costs + Opportunity Costs
Definition
 Total Costs =
Term
 Opportunity Costs
Definition
 Represent income given up by not using production factors in the next best way
Term
 Opportunity Costs
Definition
 The cost of the best rejected (i.e. foregone) opportunity
Term
 Sunk Costs
Definition
 Unrecoverable costs on equipment and/or processes; zero opportunity costs
Term
 Sunk Costs
Definition
 One that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action
Term
 Engineering Economic Analysis Procedure
Definition
 (1) Problem Recognition, Formulation, and Evaluation, (2) Development of the Feasible Alternatives, (3) Development of Cash Flows For Each Alternative, (4) Selection of a Criterion (or Criteria), (5) Analysis and Comparison of the Alternatives, (6) Selection of the Preferred Alternative, (7) Performance Monitoring and Post-Evaluation Results
Term
 (1) Problem Recognition, Formulation, and Evaluation, (2) Development of the Feasible Alternatives, (3) Development of Cash Flows For Each Alternative, (4) Selection of a Criterion (or Criteria), (5) Analysis and Comparison of the Alternatives, (6) Selection of the Preferred Alternative, (7) Performance Monitoring and Post-Evaluation Results
Definition
 Engineering Economic Analysis Procudure (7)
Term
 Explicit Costs
Definition
 Dollars used to buy production factors and pay interest
Term
 Cash Costs, Book Cost (Noncash Cost), Sunk Cost
Definition
 Explicit Costs (3)
Term
 Cash Cost
Definition
 a cost that involves payment in cash and results in cash flow
Term
 Book Cost
Definition
 A payment that does not involve cash transaction
Term
 Book Cost
Definition
 Represent the recovery of past expenditures over a fixed period of time
Term
 Depreciation
Definition
 Most common example of book cost
Term
 Depreciation
Definition
 Value lost in buildings and equipment because of age, wear, obsolesence
Term
 Depreciation
Definition
 What is charged for the use of assets, such as plants and equipment
Term
 Depreciation
Definition
 Not a cash flow
Term
 Sunk Costs
Definition
 Unrecoverable costs on equipement and/or processes
Term
 Sunk Costs
Definition
 Zero opportunity costs
Term
 Fixed Costs
Definition
 Those unaffected by changes in activity level over a feasible range of operations for the capacity or capability available
Term
 Fixed Costs
Definition
 Typically include insurance and taxes on facilities, general management and administrative salaries, license fees, and interest costs on borrowed capital
Term
 Fixed Costs
Definition
 When large changes in usage of resources occur, or when plant expansion or shutdown is involved, ____________ will be affected
Term
 Total Fixed Costs (TFC)
Definition
 Total costs for fixed factor inputs
Term
 Total Fixed Costs (TFC)
Definition
 Constant for any amount of output produced--even zero
Term
 Total Fixed Costs (TFC)
Definition
Term
 Least Cost Rule
Definition
 To produce any output at the least cost, buy inputs until the marginal product per dollar spent on each input is equal
Term
 Substitution Rule
Definition
 if the price of one input factor falls while the prices of the remaining factors remain unchanged, firms profit by substituting the now cheaper factor for all other factors
Term
 Long-Run Average Cost Curve (LRAC)
Definition
 The envelope of all short-run average total cost curves of that firm
Term
 Utility
Definition
 Measure of the value which consumers of a product or service place on that product or service
Term
 Demand
Definition
 Reflection of this measure of value and is represented by price per quantity of output
Term
 Price
Definition
 Some constant value minus some multiple of the quantity demanded
Term
 price (p)
Definition
 a-bD=
Term
 a-bD
Definition
 Price (p) =
Term
 Total Revenue
Definition
 p*D
Term
 p*D
Definition
 Total Revenue =
Term
 Profit Maximization
Definition
 Occurs where total revenue exceeds total cost by the greatest amount
Term
 Profit Maximization
Definition
 Occurs where MC=MR
Term
 MC=MR
Definition
 where profit maximization occurs
Term
 D*
Definition
 (a-AVC)/2b =
Term
 (a-AVC)/2b
Definition
 D*=
Term
 Negative
Definition
 To ensure profit maximization rather than minimization, the sign of the second derivative must be ________
Term
 Breakeven Determination
Definition
 Occurs where TR=TC
Term
 TR=TC
Definition
 breakeven determination occurs where:
Term
 Investment Cost
Definition
 Also known as capital investment
Term
 Investment Cost
Definition
 the capital (money) required for most activities of the acquisition phase
Term
 Working Capital
Definition
 the capital (money) required for most activities of the acquisition phase
Term
 Operation and Maintenance Cost
Definition
 includes many of the recurring annual expense items associated with the operation phase of the life cycle
Term
 Disposal Cost
Definition
 includes non-recurring costs of shutting down the operation
Term
 Capital
Definition
 Wealth in the form of money or property that can be used to produce more wealth
Term
 Equity Capital
Definition
 That owned by individuals who have invested their money or property in a business project or venture in the hope of receiving a profit
Term
 Debt Capital
Definition
 Often called borrowed capital
Term
 Debt Capital
Definition
 Obtained from lenders (e.g. through the sale of bonds) for investment
Term
 Simple Interest
Definition
 The total interest earned or charged is linearly proportional to the initial amount of the loan (principal), the interest rate and the number of interest periods for which the principal is committed
Term
 Compound Interest
Definition
 Whenever the interest charge for any interest period is based on the remaining principal amount plus any accumulated interest charges up to the beginning of that period
Term
 Consumer Price Index (CPI)
Definition
 Based on a market basket of the most commonly consumed goods and services
Term
 Consumer Price Index (CPI)
Definition
 Uses some stated base year quantities as the constant (or weight) for the index
Term
 Consumer Price Index (CPI)
Definition
 LaSpeyres type index
Term
 GDP Deflator
Definition
 Based on all of the goods and services produced in the economy for a given year
Term
 GDP Deflator
Definition
 Uses current year quantities as the constant (or weight) for the index
Term
 GDP Deflator
Definition
 Paasche Type index
Term
 Learning Curve Method of Projecting Costs
Definition
 Mathematical model that explains increasing worker efficiency and improved performance from repetitive production
Term
 Learning Curve Method of Projecting Costs
Definition
 Also experience curve or manufacturing progress function
Term
 Learning Curve Method of Projecting Costs
Definition
 Shows the reduction in costs resulting from continued employee efficiency as these employees process additional output
Term
 Learning Curve Method of Projecting Costs
Definition
 measured in terms of the percentage decrease in additional labor cost each time output doubles
Term
 Power Sizing Technique of Projecting Costs
Definition
 Also referred to as exponential model
Term
 Power Sizing Techinique of Projecting Costs
Definition
 Used for costing plants and equipment
Term
 Power Sizing Technique of Projecting Costs
Definition
 Recognizes that cost varies as some power of the change in capacity or size
Term
 The Index
Definition
 Recognizes that cost varies as some power of the change in capacity or size
Term
 The Index
Definition
 Changes usually occur as a result of:•Technological advances•Availability (scarcity) of labor and materials•Changes in consumer buying patterns
Term
 The Index
Definition
 It establishes a reference from some base time period (i.e. a base year)
Term
 The Index
Definition
 When compared to a current-year index measures the amount (%) change from the base period
Term
 The Unit Technique
Definition
 Per unit factor
Term
 The Factor Technique
Definition
 An extension of the unit method
Term
 The Factor Technique
Definition
 Sum of component costs estimated directly and the products of per unit costs and component quantities
Term
 Cost Estimating Relationship (CER)
Definition
 A mathematical-model building technique based on statistical analysis
Term
 Linear Equation
Definition
 Dependent variable linearly related to independent variable – both x and y coordinates linearly incremented (linear grid)
Term
 Power Equation
Definition
 Both dependent and independent variables are exponentially related. Both x and y coordinates logarithmically incremented (log-log relationship) (logarithmic grid)
Term
 CER Equation
Definition
 This equation is meant to describe, as closely as possible, the respective relationship that exists between a dependent variable and one or more independent variables
Term
 Logarithmic Equation
Definition
 Dependent variable linearly related to logarithmic function of independent variable. Y-axis coordinate linearly increment. x-axis coordinate logarithmically incremented (semi-log relationship)
Term
 Exponential
Definition
 Dependent variable logarithmically related to linear function of the independent variable. Y-axis coordinate is logarithmically incremented; x-axis coordinate is linearly incremented (semi-log relationship)
Term
 CER Equation
Definition
 When measured by the appropriate scale, each will produce a linear regression (trend) line
Term
 Standard Error (SE)
Definition
 Provides an average of the differences between actual and predicted values
Term
 Standard Error (SE)
Definition
 The square root of the sum of the differences of actual sample values and predicted sample values divided by the sample size
Term
 Standard Error (SE)
Definition
 The smaller this is, the better the predition
Term
 Correlation Coefficient (R)
Definition
 Measures how closely the data points meet the trend or regression line
Term
 Correlation Coefficient (R)
Definition
 a ratio of explained deviation to total deviation
Term
 Correlation Coefficient (R)
Definition
 The closer that the absolute value of this number is to 1, the more closely the CER equation explains the actual values in the dependent variable population
Term
 Cost Estimating
Definition
 Used to describe the process by which the present and future cost consequences of engineering designs are forecast
Term
 Cost Estimating
Definition
 Used to provide information used in setting a selling price for quoting, bidding, or evaluating contracts
Term
 Cost Estimating
Definition
 Used to determine whether a proposed product can be made and distributed at a profit
Term
 Cost Estimating
Definition
 Used to evaluate how much financial capital can be justified for process changes or other improvements
Term
 Cost Estimating
Definition
 Used to establish benchmarks for productivity improvement programs
Term
 Top-down Approach
Definition
 Uses historical data from similar engineering projects
Term
 Top-down approach
Definition
 Used to estimate costs, revenues, and other parameters for current project
Term
 Top-down Approach
Definition
 Modifies original data for changes in inflation/deflation, activity level, weight, energy consumption, size, etc.
Term
 Top-down Approach
Definition
 Best use is early in estimating process
Term
 Bottom-up Approach
Definition
 More detailed cost-estimating method
Term
 Bottom-up Approach
Definition
 Attempts to break down project into small, manageable units and estimate costs, etc...
Term
 Bottom-up Approach
Definition
 Smaller unit costs added together with other types of costs to obtain overall cost estimate
Term
 Bottom-up Approach
Definition
 Works best when detail concerning desired output defined and clarified
Term
 Capacity
Definition
 the level of output consistent with the lowest point of the ATC
Term
 Excess Capacity
Definition
 Production at a point less than the lowest point of ATC
Term
 Above (Exceeded) Capacity
Definition
 Production at a point greater than the lowest ATC
Term
 Medium of Exchange, Store of Value, Unit of Account
Definition
 Money (3)
Term
 Money
Definition
 Medium of Exchange, Store of Value, Unit of Account
Term
 Medium of Exchange
Definition
 Means of payment for goods or services; what sellers accept and buyers pay
Term
 Store of Value
Definition
 A way to transport buying power from one time period to another
Term
 Unit of Account
Definition
 A precise measurement of value or worth; allows for tabulating debits and credits
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