1. Costing and Finance
P R Upadhyay

2. Outline Business & Accounting terminology
Cost classification & analysis
Cost-benefit analysis
Interest & time value of money
Investment decision
Risk analysis
Demand analysis and sales forecasting
Engineering Economy
12/30/2018

3. Business & Accounting terminology
Covered in General Accounting Principles
12/30/2018

4. Cost
Cost is the amount of expenditure, actual or notional, relating to a specific thing or activity.
The special thing or activity may be a product, job, service, process or any other activity.
Cost is expressed in monetary terms.
12/30/2018

5. Cost classification
It is the process of grouping costs according to their common characteristics.
Cost classification serves the following objectives:
Determining product cost
Planning
Decision making
Control
12/30/2018

6. Different Cost classifications
On the basis of nature of cost:
Direct material
Direct labour
Direct expenses
Factory/ works overhead
Administrative overhead
Selling & distribution overhead
On the basis of behavior of cost:
Fixed
Variable
Mixed (Semi-variable or semi-fixed)
12/30/2018

7. Different Cost classifications
On the basis of degree of traceability to the product:
Direct cost
Indirect cost
On the basis of association with the product:
Product cost
Period cost
On the basis of function:
Manufacturing cost
Administrative cost
Selling & distribution cost
12/30/2018

8. Different Cost classifications
On the basis of relationship with the accounting period:
Capital cost
Revenue cost
On the basis of decision making and planning:
Opportunity cost
Sunk cost
Relevant cost
On the basis of controllability:
Controllable and uncontrollable cost
Standard cost
12/30/2018

9. Cost analysis
Cost analysis is the identification of the costs, as per their required classification, for the purpose of planning, decision making and controlling.
12/30/2018

10. Cost-benefit analysis
It analyses the cost and expected benefit there from.
Helps in decision making relating to level of production.
Following techniques are used:
Break-even analysis
Cost-volume-profit analysis
12/30/2018

11. Interest and time value of money
Interest is the amount of return of investment in money market.
Money has time value therefore specific cash inflow and outflow are analysed for decision making.
To determine the time value of money, following techniques are used:
Discounting
Compounding
Equivalence
12/30/2018

12. Investment decision It is fully based on time value of money.
It analyses the feasibility of an investment project from financial aspects.
Following methods are used:
Pay back period (PBP)
Discounted pay back period
Net present value (NPV)
Internal rate of return (IRR)
Profitability Index (PI)
12/30/2018

13. Risk analysis It focuses on:
identification of risk relating to project or business operation,
assessment of the impact of such risk,
prioritization of risk on the basis of their impact on business and project; and
using the methods of mitigation or avoidance.
12/30/2018

14. Demand analysis and sales forecasting
Demand analysis and sales forecasting try to identify the expected demand of the product or services to be produced or delivered and the expected volume of sales to be made
Helps in determining the level of production required, expenditures to be made and resources to be used.
Takes the help of various environmental factors, production capacity and customers behaviors.
12/30/2018

15. What is Engineering Economy?
Economic decision making for engineering systems is called engineering economy.
Engineers are the people who are familiar with all the technicalities of machinery and production therefore they are the best judges of the useful lives of an asset and they also have the technical knowledge to calculate the number of units a proposed plant would produce when operational.
In today’s competitive world of business it has become essential that engineers should practice financial project analysis for engineering projects and make rational decisions.
Engineering economy also includes the study of accounting practices for manufacturing concerns. Unique features of accounting for manufacturing concerns are process costing, batch costing, cost allocation.
Engineering economy deals with justification and selection of projects.

16. What is Engineering Economy?
systematic evaluation of the economic merits of proposed solutions to engineering problems
Principles:
– Develop the alternatives
• Alternatives need to be identified and defined.
– Focus on the difference
• Only the differences in expected future outcomes among the alternatives will effect the decision.
12/30/2018

17. What is Engineering Economy?
– Use a consistent viewpoint • Prospective outcomes should be developed from a consistent, defined viewpoint. – Consider all relevant criteria – (try to) Use a common unit of measure – Make uncertainty explicit • Uncertainty is inevitable. Identify and explore it in analyses. – Revisit your decisions
12/30/2018

18. Engineering Economic Analysis - Seven Steps
1. Recognition and formulation of the problem.
2. Development of the feasible alternatives.
3. Development of the net cash flows (and other prospective outcomes) for each alternative.
4. Selection of a criterion (or criteria) for determining the preferred alternative.
5. Analysis and comparison of the alternatives.
6. Selection of the preferred alternative.
7. Performance monitoring and post-evaluation.

19. Engineering Economy Objective – Evaluation
– How to compare the economic value of alternative design options?
Basis – Cash Flow Analysis
– One is indifferent between investments with equivalent cash flows
Key issues
– Time value of money
– Cash flows occurring at different times
– “Designs” with different durations
12/30/2018

20. Thank You
12/30/2018