Chapter 2 Cost Concepts and Design Economics

Chapter 2 Cost Concepts and Design Economics - Chapter 2...

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1 Chapter 2 Cost Concepts and Design Economics Cost Terminology: Note that the word cost and expense are used interchangeably in your book. Fixed - costs held constant (at least in the short-term) regardless of the production volume. Variable - costs that vary with the production volume. Incremental - additional cost resulting from increasing the output by one unit. Recurring - costs that are repetitive in nature (recur) including variable costs and some fixed costs. Nonrecurring - nonrepetitive costs. Direct - costs that can be easily traced to the product or service. Indirect - costs that are difficult to trace to the product or service.
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2 Examples Item F V R NR D I
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3 More Terminology Standard cost - representative cost per unit established in advance of actual production or service delivery. Cash cost - actual cash flow or payment of cash. Noncash cost - does not involve the flow of cash. Sunk cost - expenditure that occurred in the past and has no relevance to the present or the future. Opportunity cost - cost of a foregone opportunity.
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4 Life Cycle Costs Costs that occur across the life cycle of the product or service (“cradle to grave”) including recurring and nonrecurring costs. Example on p. 31 Uncertainty is highest in the beginning Commitment of resources is highest in the beginning Actual expenditure of resources is generally highest during production A rule of thumb is that the cost of a design change will increase by a factor of 10 with each step in the life cycle!
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5 Types of life-cycle costs Investment costs - the capital required for most of the activities in the acquisition phase of the life cycle. Working capital - funds required for current
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Chapter 2 Cost Concepts and Design Economics - Chapter 2...

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