Cost Annlyasis on Production

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A REPORT ON

COST ANNLYASISONPRODUCTION

MANAGERIAL ECONOMICS

DEPARTMENT OF BUSINESS AND

INDUSTRIAL MANAGEMENT

SEMESTER I, SECTION B.

2010-2011.


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COST ANALYSIS

DEPARTMENT OF BUSINESS AND INDUSTRIAL DEPARTMENT Page 1


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COST ANALYSIS


INDEX

Sr. No Topic PageNo.

1.IntroductiontoCost Analysis

BasicConcept Objectives

-4-

-4-2. TypesOfCost Analysis

Different Types Of Cost Analysis -6-3. TheoriesOfCost Analysis

Functions Of Cost Analysis -8-

3.DataDescription

Introductiontocompany RawData 0HDQ0HGLDQ0RGH6WDQGDUG'HYLDWLRQ

-11-

-12-

-12-

4.DataAnalysis

Graph Explanation-15-

5. Bibliography -18-6. Annexure -20-


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COST ANALYSIS


INTRODUCTION TO

COST ANALYSIS


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COST ANALYSIS


Introduction to Cost Analysis

Cost analysis is the most tough and important task of the business administration. Cost analysis

can also be considered as production cost. Cost analysis refers to different concepts of cost like

implicit cost, explicit cost, alternative & opportunity cost, economic cost, accounting cost,

relevant cost, and incremental cost and so on.

Cost is the expense incurred in producing a commodity. Cost analysis is very important for the

business managers for many decision regarding profitability future expense and future revenue

depend upon various types of cost. In estimating profit the managers is required to compare

cost with revenue. The revenue depends upon the price of the product in the market. The

business manager cannot control the price prevailing in the market but he can control cost by

restricting the output. The relationship between the cost and output is known as the cost

function.

Thus cost function is derived from production functions. The production functions expenses the

functional relationship between input and output. In simple term, the production function states

that output depend upon various quantities of input. If price of inputs are known we can

calculate cost of production. The cost of production of a commodity is the aggregate of pricepaid for the factors of production used in producing that commodity. So a firm has to engage the

series of various factor of production say the land, labor and capital etc, these factors have to be

rewarded by the firm for their contribution made in producing the commodity. This

compensation usually in terms of factors price is generally known as cost. Of production denotes

the value of the factor of the production engaged for producing a given article. (Commodity)

From the above discussion two main points has been taken into consideration.

1) Cost function

2) Cost of production

A cost function expresses the relationship between cost and its determinants. Several factors

influence cost. When their relationship to cost is expressed in a functional or mathematical form,it is called cost function. Symbolically

C = f (S, O, P, T N)

Where C is cost P is price of inputs

S is size of plants T is technology

O is level of output N is no of other factors

Cost function can be formulated for the short run and long run depending upon the requirement

of the firm. However, the short run and long run functions are interrelated.

Objectives of Cost Analysis

The purpose of this decision aid is to facilitate the cost calculation for the ranch pickup

and/or a livestock trailer.

The decision aid calculates the per mile and annual costs of a pickup or trailer, the cost

of making a trip with livestock, and also allows for calculation of costs for enterprises by

allocating the percent costs between forages, livestock, and crops.

The program is useful for enterprise budgeting, estimating transportation costs and

evaluating purchasing alternatives.


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COST ANALYSIS


TYPES OF

COST ANALYSIS


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COST ANALYSIS


Types of Cost Analysis

Different costs are explained as below:-

Explicit Cost: - It refers to the actual expenditures of the firm to hire, rent, or purchase

of inputs that are required in production. It includes the wages to hire labor, the rentalprice of capital, equipment, buildings, and the purchase price of raw materials and semi-

finished products.

Implicit Cost: - It refers to the value of the inputs owned and used by the firm in its own

production activity. It includes the highest salary that the entrepreneur could earn in his

or her best alternative employment and the highest return that the firm could receive

from investing its capital in the most rewarding alternative use or renting its land and

building to the highest bidder. Even though the firm does not incur any actual expenses

to use these inputs, they are not free, since the firm could not sell or rent them to other

firms.

Fixed Cost: - Fixed costs are costs that must be paid whether or not any units areproduced. These costs are "fixed" over a specified period of time or range of production.

E.g. rent, property tax, insurance, or interest expense.

Variable Cost: - Variable costs are costs that vary directly with the number of products

produced. For instance, the cost of the materials needed and the labour used to produce

units isn't always the same.

A cost of labor, material or overhead that changes according to the change in the volume of

production units. Combined with fixed costs, variable costs make up the total cost of production.

While the total variable cost changes with increased production, the total fixed cost stays the

same.

In economics, both explicit and implicit cost must be considered. That is, in measuring

production costs, the firm must include alternative or opportunity costs of all inputs, whether

purchased or owned by the firm. The reason is that the firm could not retain a hired input if it

paid a lower price for the input than another firm. Similarly, it would not pay for a firm to used

and owned input if the value (productivity) of the input is greater to another firm. These

economic costs must be distinguished from, accounting costs, which refer only to the firms

actual expenditure or explicit costs incurred for purchased or rented inputs. Accounting or

historical costs are important for financial reporting by the firm and for tax purposes. For

managerial decision making purposes (with which we are primarily interested here), however,

economic or opportunity costs are the relevant costs concept that must be used, two examples

will clarify this distinction and will highlight its importance in arriving at correct managerial

decisions.

Incremental costs, on the other hand, is a broader concept and refers to the change in total

costs from implementing a particular management decision, such as the introduction of a new

product line, the undertaking of a new advertising campaign, or the production of a previously

purchased component. The costs that are not affected by the decision are irrelevant and are

called sunk costs.


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COST ANALYSIS


THEORIES OF

COST ANALYSIS


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COST ANALYSIS


Functions Of Cost Analysis

Short Run Total and Per Unit Cost Functions:

The total obligations of the firm per time period for all fixed inputs are called total fixed

costs(TFC). These include interest payments on borrowed capital, rental expenditures

on leased plant and equipment (or depreciation associated with the passage of time on

owned plant and equipment), property taxes, and those salaries (such as for top

management) that are fixed by contract and must be paid over the life of the contract

weather the firm produces or not. Total variable costs (TVC) , on the other hand, are the

total obligations of the firm per time period for all the variable inputs that the firm uses.

Variable inputs are those that the firm can vary easily and on short notice. Included in

variable costs are payments for raw materials, fuels, depreciation associate d with the

use of the plant and equipment, most labor costs, excise taxes, etc. Total costs

(TC)equal total fixed costs (TFC) plus total variable costs (TVC). That is,

TC = TFC + TVC

Within the limits imposed by the given plant and equipment, the firm can vary its

output in the short run by varying the quantity used of the variable inputs. This gives rise

of the TFC, TVC, and TC functions of the firm. These show, respectively the minimum

fixed, variable, and total costs of the firm to produce various levels of outputs in the short

run. Cost functions show the minimum costs of producing various levels of output on the

assumptions that the firm uses the optimal or the least -cost input combinations to

produce each level of output. Thus, the total cost of producing a particular level of output

is obtained by multiplying the optimal quantity of each input used time the input price and

than adding all these costs. In defining cost functions, a ll inputs are valued at their

opportunity cost, which includes both explicit and implicit costs. Input prices are assumedto remain constant regardless of the quantity demandedof each input by the firm.

From the total fixed, total variable, and total cost function, we can derive the

corresponding per-unit (average fixed, average variable, average total, and marginal)

cost functions of the firm. Average fixed costs (AFC)equal total fixed costs (TFC)

divided by thelevel of output (Q). Average variable cost(AVC) equal total variable costs

(TVC) divided by output.Average total cost (ATC) equal total costs (TC) divided by

output. An average total cost also equals average fixed cost plus average variable cost.

Finally, marginal cost (MC)is the change in total costs or the change in total variable

costs (TVC) per unit change in output.


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COST ANALYSIS


That is,


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COST ANALYSIS


DATADESCRIPTION

HINDUSTANPETROLEUMCORPORATIONLTD.(BSECODE 500104)


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COST ANALYSIS


HPCL a Fortune 500 company, was originally incorporated in the name of Standard

Vacuum Refining Company of India Limited on July 5, 1952. It is the first

company in India to be listed on a recognized Indian Stock Exchange - BSE.

Hindustan Petroleum Corporation Limited comes into being after the takeover and

mergerof erstwhile Esso Standard and Lube India Limited. HPCL thus comes into

being after merging four different organizations at different points of time.

Today HPCL stands with an annual turnover of Rs. 1,08,599 Crores and

sales/income from operations of Rs 1,14,889 Crores (US$ 25,306 Millions) during FY

2009-10, having about 20% Marketing share in India and a strong market

infrastructure. HPCL operates 2 major refineries producing a wide variety of

petroleum fuels & specialties, one in Mumbai (West Coast) of 6.5 Million Metric

Tonnes Per Annum (MMTPA) capacity and the other in Vishakapatnam, (East Coast)

with a capacity of 8.3 MMTPA.

HPCL also owns/operates the largest Lube Refinery in the country producing Lube

Base Oils of international standards, with a capacity of 335 TMT. This Lube Refinery

accounts for over 40% of the India's total Lube Base Oil production. HPCL's vast

marketing network consists of 13 Zonal offices in major cities and 101 Regional

Offices facilitated by a Supply & Distribution infrastructure comprising Terminals,

Aviation Service Stations, LPG Bottling Plants, and Inland Relay Depots & Retail

Outlets, Lube and LPG Distributorships. HPCL, over the years, has moved fromstrength to strength on all fronts.

Management: HINDUSTAN PETROLEUM CORPORATION LTD .

Name Designation

S Roy Choudhury Chairman and Managing director

B Mukherjee Whole Time Director

P K Sinha Part Time Director

Gitesh K Shah Non Official PartTime Director

V Viziasaradhi Whole Time Director

K Murli Whole Time Director

L N Gupta Part Time Director

(Source:htttp://www.moneycontrol.com/financials/hindustanpetroleumcorportion/results/quarterly-results/hpc)


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COST ANALYSIS


RAW DATA: -

Year

Raw Materials

(in Crores)

Power & Fuel Cost

(in Crores)

Employee Cost

(in Crores)

Other Manufacturing Expenses

(in Crores)

2002 35099.19 93.36 554.09 235.36

2003 44303.1 107.4 546.8 290.97

2004 45321.45 104.1 570.29 327.89

2005 54419.08 114.34 713.01 411.83

2006 67628.41 129.6 640.76 498.14

2007 82667.01 160.58 728.61 531.12

2008 100230.59 190.82 870.59 584.54

2009 114389.83 192.19 1134.45 775.36

2010 100405.41 473.71 1615.76 1125.97

Selling and Administration

Expenses(in Crores)

Miscellaneous

Expenses(in Crores)

Fixed Cost

(Depreciation)(in Crores)

Total Quantity Produced(in tones)

1625.56 149.12 9843.45 11786289.00

1659.36 168.26 9843.45 12368425.00

2155.1 208.9 9843.45 13118992.00

2469.34 189.67 9843.45 13266540.00

2740.94 271.92 9843.45 13398719.00

3107.7 369.79 9843.45 15922729.00

3598.87 554.58 9843.45 15970764.00

3774.77 770.66 9843.45 16133139.00

4397.39 1088.64 9843.45 15572476.00

MEAN, MEDIAN, MODE, STANDARD DEVIATION: -

1. Mean:-

Mean returns the average of a given number of observations.

Mean = Sum of All Given Observations / Total Number ofGiven Observations

X = x / n

X Y


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COST ANALYSIS


Data Analysis

GRAPH EXPLANATION: -


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COST ANALYSIS


TOTAL FIXED COST, TOTAL VARIABLE, TOTAL COST CRUVE

X axis: Years

Yaxis: Cost

In this long run graph we have explained Total Fixed Cost, Total Variable Cost and

Total Cost. Here variable cost increases every year as the production increases and

here we had considered fixed cost constant. The TC curve has the same shape as the

TVC curve. The Fixed Costs remains constant whether firm produces or not. Here

increase in fixed asset, depreciation cost and other miscellaneous expenses remains

constant.

In this short run graph we have explained Total Fixed Cost, Total Variable Cost and

Total Cost. We had shown the graph as per the theory given in the book. As per

theory the graph never diminishes so we had shown the graph from the year

2002-2009.

AVERAGEFIXED COST CURVE


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COST ANALYSIS


X axis: Years

Yaxis: Average Fixed Cost

Here in this graph average fixed cost is displayed. AFC declines continuously as the

output rises. As here we had considered the increase in assets as constant and after

certain period of time the AFC curve increases as the cost increases because as the

time is spend the maintenance cost of assets increases.

AVERAGEVARIABLE COST CURVE

X axis: Years

Yaxis: Average Variable Cost

In general terms we see this curve as a U Shape. But here due to Inflation graph is

not a U Shape curve. This cant be considered as diseconomy scale, but it happens


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COST ANALYSIS


due to structural changes in economy like increase in crude price, power & supply,

salary, economic inflation etc. which is not in the hand of company.

AVERAGE COST CURVE

X axis: Years

Yaxis: Average Total Cost

Average Cost Curve is also generally U shape. But here also because of Inflation in

economy this curve is not a U shape. This cant be considered as diseconomy scale,

but it happens due to structural changes in economy like increase in crude price,

power & supply, salary, economic inflation etc. which is not in the hand of company.

MARGINAL COST

X axis: Years

Yaxis: Marginal Cost


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COST ANALYSIS


Generally Marginal Cost Curve tends to increasing from decreasing. But here

Marginal Cost Curve is not stable.It attains its stability from Year 2005 to 2008,

where we can see the curve as Tick mark shape. In this period only company will

reach their equilibrium point.

SHORT-RUN MARGINAL COST

X axis: Years

Yaxis: Marginal Cost

This is the short run marginal cost curve, where company attains stability. It attains

its stability from Year 2005 to 2008, where we can see the curve as Tick mark shape.

In this period only company will reach their equilibrium point.

Bibliography: -

Books:

SalvatoreDominck, ShrivastavaR. (2008), Mana gerialEconomics, Oxford University

Publication.

H.CraigPetersen., and W. Cris Lewis. (1995),Managerial Economics, Prentice Hall

Publication

Website:

http://www.moneycontrol.com/financials/hindustanpetroleumcorportion/results/

quarterly-results/hpc


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COST ANALYSIS


ANNEXURE

ANNEXURE: -


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COST ANALYSIS


Year

Raw Materials

(in Crores)

Power & Fuel Cost

(in Crores)

Employee Cost

(in Crores)

Other Manufacturing Expenses

(in Crores)

2002 35099.19 93.36 554.09 235.36

2003 44303.1 107.4 546.8 290.97

2004 45321.45 104.1 570.29 327.89

2005 54419.08 114.34 713.01 411.83

2006 67628.41 129.6 640.76 498.14

2007 82667.01 160.58 728.61 531.12

2008 100230.59 190.82 870.59 584.54

2009 114389.83 192.19 1134.45 775.36

2010 100405.41 473.71 1615.76 1125.97

Selling and Administration

Expenses

(in Crores)

Miscellaneous

Expenses

(in Crores)

Fixed Cost

(Depreciation)

(in Crores)

Total Quantity Produced

(in tones)

1625.56 149.12 9843.45 11786289.001659.36 168.26 9843.45 12368425.00

2155.1 208.9 9843.45 13118992.00

2469.34 189.67 9843.45 13266540.00

2740.94 271.92 9843.45 13398719.00

3107.7 369.79 9843.45 15922729.00

3598.87 554.58 9843.45 15970764.00

3774.77 770.66 9843.45 16133139.00

4397.39 1088.64 9843.45 15572476.00

Total Variable Cost(in Crores)

Total Fixed Cost(in Crores) Total Cost (in Rs. Crores)

Average Cost(in Crores)

37756.68 9843.45 47600.13 40.39

47075.89 9843.45 56919.34 46.02

48687.73 9843.45 58531.18 44.62

58317.27 9843.45 68160.72 51.38

71909.77 9843.45 81753.22 61.02

87564.81 9843.45 97408.26 61.18

106029.99 9843.45 115873.44 72.55

121037.26 9843.45 130880.71 81.13

109106.88 9843.45 118950.33 76.38

Average Fixed Cost

(in Crores)

Average Variable Cost

(in Crores)

Marginal Cost

(in Crores)

8.35 32.03


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COST ANALYSIS

DEPARTMENTOF BUSINESS AND INDUSTRIAL DEPARTMENT Page 21

7.96 38.06 160.09

7.50 37.11 21.47

7.42 43.96 652.64

7.35 53.67 1028.34

6.18 54.99 62.02

6.16 66.39 3844.116.10 75.02 924.24

6.32 70.06 212.79

MEAN: -

X

(Total Production)

Y

(Total Cost)

x 127538073 782823.9

N 9 9

X 14170897 86980.43

MEDIAN: -

X

(Total Production)

Y

(Total Cost)

Median 13398719.00 82443.45

STANDARD DEVIATION: -

X

(Total Production)

Y

(Total Cost)

Stdev 1716672.848 30863.8

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Cost Annlyasis on Production

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