Manuel S.

Enverga University Foundation, Lucena City College of Engineering

CLASSIFICATION OF COST
ENGINEERING ECONOMY (ECON123)

Synchronous Lecture
College of Engineering
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

CLASSIFICATION OF COST
• Many types of cost arise in economy studies
of a new or existing enterprise whenever any
change in operations or policy is made.
• While an engineer may be cognizant of the
various types of cost, it appears that
classifying the same and giving the
applications of each will make them clearer.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Types of Cost
1. First cost
2. Fixed cost
3. Variable cost
4. Increment cost
5. Differential cost
6. Marginal cost
7. Sunk cost
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

First Cost
• This includes all the initial expenses for starting
any enterprise.
• In general, this will be the sum of the
promotion and development cost.
• First cost is important, because if it is not met,
an enterprise may fail to materialize. The
success of an enterprise may be jeopardized
right from the beginning due to lack of
capital.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

First Cost
Thus, prior to actual operation, the sponsors of a new enterprise
must spend for the following:
1. Investigation of the market possibilities
2. Source of raw materials
3. Source of the labor force
4. Negotiation with the owners of the chosen plant site
5. Securing from the municipal council of a permit or license to
locate in the town chosen
6. Legal fees to draft the corporation papers,
7. Security of a sufficient number of stockholders with
adequate capital,
8. Fees to be paid to the technical staff for planning the
factory
9. Construction expenses
10.Initial cost of machinery and other equipment
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Fixed Cost
• This are those which remain relatively
constant regardless of any change made in
operation or policy.
• Thus, the rental of a property may remain
unchanged even if the output of a factory
changes a great deal.
• The depreciation of a piece of equipment
remain constant regardless of its output.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Variable Cost
• This are those which vary with output or any
change in activities of any enterprise.
• For example, the cost of materials used
depends on the output.
• In general, cost for direct materials, direct
labor, and other items which can be directly
allocated to each unit produced, are
classified as variable cost.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Increment Cost
• This refers to any increase in cost.
• Increment in costs are important in problems
where it will be determined whether a
change in production will be profitable for
the enterprise.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Differential Cost
• De Garmo, differential cost are those cost
“which arise as the result of change in
operation policy.”
• Thuesen, “the ratio of a small increment of
cost and a small increment of output.
• Differential cost may also be considered as
synonymous with increment cost.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Marginal cost
• The additional cost of producing one
more unit of a product.
• Marginal cost may also be considered
as increment cost for additional unit.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Sunk Cost
• Represents money which has been spent or
capital which has been invested and which
cannot be recovered due to certain reasons.
• Sunk cost may also be defined as the
unrecovered balance remaining if the net
income received does not materialized
• Sunk cost represents losses due to errors in
past decisions.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Example 1
The total costs of manufacturing 350 and 500 units of a
product are, respectively, ₱9200 and ₱11000.
a) Determine the total fixed cost and variable cost
per unit.
b) Determine the average fixed cost per unit for the
first 350 units.
c) Determine the profit or loss if 80 units in excess of
the first 350 units can be sold at ₱32.00 each
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Example 1 Solution
The total costs of manufacturing 350 and 500 units of a
product are, respectively, ₱9200 and ₱11000.
a) Determine the total fixed cost and variable cost per
unit.
Substitute the value of v
(eqn. 1) ₱9,200
any of the equations
(eqn. 2) ₱11,000 ₱9,200
₱9,200
9200 - 350v = 11,000 – 500v ₱9,200
11,000 – 9,200 = 500v – 350v ₱9,200 −₱4,200
₱5,000
1800 = 150v
150 150
Answer: v = ₱12.00
 Example 1:
Solution
The total costs of manufacturing 350 and 500 units of a
product are, respectively, ₱9200 and ₱11000.
₱12.00
b) Determine the average fixed cost per unit for the
first 350 units.
Average fixed cost for the first 350 units
₱
₱14.29

c) Determine the profit or loss if 80 units in excess of the

Example 2:
• The total cost of manufacturing 10,000 pieces and 12,000
pieces of a certain plastics product are ₱2,000 and
₱2,280, respectively. Determine the following:
a) The average production cost per unit for the first 10,000
pieces;
b) The variable cost;
c) The total fixed cost;
d) The average fixed cost per unit for the first 10,000
pieces;
e) The profit or loss if 1,000 units in excess of the first 10,000
pieces can be sold for ₱0.18 each.
 Example 2:
Solution
The total cost of manufacturing 10,000 pieces of and
12,000 pieces of a certain plastics product are ₱2,000 and
₱2,280, respectively. Determine the following:
a) The average production cost per unit for the first 10,000
pieces;
₱ ,
₱0.20
,
b) The variable cost;
Let F = total fixed variable cost regardless of output,
v = variable cost per piece
For 10,000 pieces, ₱2,000
For 12,000 pieces, ₱2,280
Solving for these equation simultaneously,
₱0.14 per unit
Example 2:
Solution
The total cost of manufacturing 10,000 pieces of and
12,000 pieces of a certain plastics product are ₱2,000
and ₱2,280, respectively. Determine the following:
c) The total fixed cost;
From Eqs. (1) and (2), F = ₱600
d) The Average fixed cost for the first 10,000 pieces;
₱
₱0.06 per unit
e) The profit or loss if 1,000 units in excess of the first
10,000 pieces can be sold for ₱0.18 each.
The fixed cost will be charge to the first 10,000 units. A profit
will result because the selling price of ₱0.18 exceeds the
variable cost and average fixed cost of ₱0.14 per unit and
₱0.06 with a total of ₱0.02. Profit for 1,000 units in excess of
10,000 units = 1,000( ₱0.02) = - ₱20.00.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

Example 3:
• A machine for producing a special kind of product
has been installed cost of ₱200,000. It is estimated to
have a salvage value of ₱20,000 after an expected
life of 10 years. The annual cost for insurance, taxes,
maintenance, repairs, supervision and space is
₱50,000. The operator of the machine is paid ₱20.00
per actual hour he operates the machine. The cost
of supplies and power is ₱25.00 for each in actual
operation. The product takes 15 minutes to process
per unit.
• Determine the production cost per unit if (a) 5,000,
(b) 10,000, (c) 30,000, and (d) 40,000 units are made
in one year. Use sinking fund depreciation at 15%.
 Manuel S. Enverga University Foundation, Lucena City College of Engineering
An Autonomous University

A machine for producing a special kind of product has been installed cost of ₱200,000. It is
estimated to have a salvage value of ₱20,000 after an expected life of 10 years. The annual cost
for insurance, taxes, maintenance, repairs, supervision and space is ₱50,000. The operator of the
machine is paid ₱20.00 per actual hour he operates the machine. The cost of supplies and power
is ₱25.00 for each in actual operation. The product takes 15 minutes to process per unit.
Determine the production cost per unit if (a) 5,000, (b) 10,000, (c) 30,000, and (d) 40,000 units are
made in one year. Use sinking fund depreciation at 15%.

D = 8,865.37
A machine for producing a special kind of product has been installed cost of ₱200,000. It is estimated to have a
salvage value of ₱20,000 after an expected life of 10 years. The annual cost for insurance, taxes, maintenance,
repairs, supervision and space is ₱50,000. The operator of the machine is paid ₱20.00 per actual hour he operates
the machine. The cost of supplies and power is ₱25.00 for each in actual operation. The product takes 15 minutes
to process per unit.
Determine the production cost per unit if (a) 5,000, (b) 10,000, (c) 30,000, and (d) 40,000 units are made in one
year. Use sinking fund depreciation at 15%.

Example 3:
Solution
• Depreciation = ₱8,865.37
• Insurance, taxes, maintenance, etc.
• Total fixed cost ₱58,865.37
• Variable cost per hour

Annual Production Time Variable Costs per Fixed Cost per year Total Annual Costs Production Cost
Production (15 mins per unit) year per unit
(Units) (Hours)

(a) 5,000 1,250 ₱56,250 ₱58,865.37 ₱115,115.37 ₱23.02

(b) 10,000

(c) 30,000

(d) 40,000
Thank you!