Engineering
Economy
First Exam Coverage
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Principles of
Engineering Economy
Cost Concept
Cost Terminology:
Fixed Cost - are those unaffected by changes in activity level over a feasible range of
operations for the capacity or capability available. Typical fixed costs include
insurance and taxes on facilities, general management and administrative salaries,
license fees and interests costs on borrowed capital.
Varaible Cost - are those associated with an operation that varies in total with the
quantity of output or other measures of activity level.
Incremental Cost (incremental revenue) - is an additional cost (revenue) that
results from increasing the output of a system by one or more units.
Cost Concept
Cost Terminology:
Direct Cost - are costs that can be reasonably measured and allocated to a specific output or work activity. The
labor and material costs are directly associated with the product, service, or construction activity. For example
the materials needed to make a pair of scissors would be a direct cost.
Indirect Cost - are costs that are difficult to allocate to a specific output or work activity. For example the costs
of common tools, general supplies, and equipment maintenance in a plant are treated as indirect costs.
Standard Cost - are planned costs per unit of output that are established in advance of actual production or
service delivery. For example a material cost is P10, and the standard quantity is 20 so therefore the standard
costs is P200.
Overhead Costs - consists of plant operating costs that are not direct labor or direct material costs. Examples
include electricity, general repairs, property taxes, and supervision.
Cost Concept
Cost Terminology:
Cash Cost - a cost that involves payment of cash and results in a cash flow.
Book Cost - is a noncash cost and are the future expenses incurred for alternatives being analyzed. The most
common example of book costs is depreciation.
Sunk Cost - is one that occurred in the past and has no relevance to estimates of future costs and revenues
related to an alternative course of action. Are irretroevable consequences of past decisions. Example
downpayment of an item that is not pursued and is forfeited.
Opportunity Costs - also known as alternative costs is incurred because of the limited resources, such that the
opportunity to use those resources to monetary advantage. Example a student who could earn P100,000 a year
for working choose to got o school for a year and spend P50,000.
Description and Role in Decision Making
Since most decisions affect what will be done, the time frame of the engineering
economy is primarily the future. Therefore, the numbers used in the
engineering economy are the best estimates of what is expected to occur.
The estimates and the decision usually involve four essential elements:
• Cash flows
• Times of occurrence of cash flows
• Interest rates for the time value of money
• Measure of economic worth for selecting an alternative
Description and Role in Decision Making