Project Cost Estimation q What is Cost An

Project Cost Estimation q What is Cost? § An amount paid or required in payment for a purchase/for the production/upkeep of something. . measured in terms of effort/time expended. § Resources sacrificed/foregone to achieve a specific objective. § Cost is the amount of expenditure (actual or national), incurred on or attributable to, a specified thing or activity. § Cost is generally measured in monitory terms. § The term ‘cost’ will be meaningful only with a suffix or a prefix, with reference to some object. E. g. material, finance, BOP, Variable, indirect, process et al. 1

q Elements of Cost: § Basic elements: material, labour, expense ØMaterial – All materials required to be consumed, upto specified point ØLabour – All remuneration paid to the staff and workmen for conversion of raw materials into finished products. ØExpense – Cost of utilities and services used for the conversion process including notional cost for the use of owned assets. 2

q Further sub-division : § Direct Costs – can be identified with or related to the product / services § Indirect Costs – can not be identified/traced to a given object in an economical way § Basic cost elements shall be sub-divided into Direct and Indirect costs. § Prime cost – sum of Direct Costs § Overhead cost – sum of Indirect cost ØTypes of overhead cost: v. Production O/H, Admin O/H, Selling & Distribution O/H 3

q Summary : • • Direct (Matl. + labour + expenses) = Prime cost Prime Cost + Factory O/H = Factory cost + Admin O/H = Cost of Production + Selling & Dist. O/H = Cost of Sales 4

q Cost Allocation and Apportionment : § Cost Allocation – Allotment of the whole items of costs to cost centers / cost units § Cost Apportionment – Allotment of proportions of item of cost to cost centers / cost units § Direct costs are allocated to the cost center § Indirect costs are apportioned expenses. 5

q Cost Classification : § It is a process of grouping costs according to their common characteristics. E. g. Nature, function, variability, controllability, normality et al. § Essential for identifying costs with the cost center for the purposes of determination, control and decision making. 6

q Cost classification by variability : § Fixed costs – tend to remain unaffected by the change in volume of output. E. g. Supervisory salary, T & D § Variable costs – tend to vary directly with the volume of output. E. g. direct material § Semi fixed/ Semi-variable cost – tend to be partly fixed an partly variable. E. g. tel. Exp. , ele. bills 7

q Marginal Costing : § A principle of costing in which variable costs are charged to the cost center/unit and the fixed costs are written off in full, against the contribution § Contribution = (Sales – Variable cost of sales) § This contribution Margin (CM) is taken as basis for decision making pertaining to pricing, product-mix, Make Vs Buy et al. 8