CONTENT

Cost Of Multiple Products. Economies Of Scale.

Production Function.
Cost And Profit Forecasting. Break Even Analysis.

PRESENTED BY
SHWETA SHAH

AMRUTA SAKPAL
TEJASHREE DESAI

SAGAR JAMBHALE
SUVIDHA PAWAR

Cost of Multiple Production

For modern firms.

Produced several product under one roof.

In many manufacturing enterprises two or

more different products emerge from common production process and common raw material used.
Split Point : When two or more different

products emerge from a single common production process and a single raw material, they got identified as separate products.

Types Of Multiple Production Costing

Joint Products :

When an increase in the production of one product causes an increase in the output of another product.
Alternative Products :

An increase in the output of product is accompanied by reduction in the output of other products.
By-Products :

When one product is much less important than other, it may be regarded as by-product. A gratuitous use of waste material.

Economies of Scale
Economies refer to lower costs.

Economies of scale refers to the efficiencies associated with

large scale operations; it is a situation in which the long run average costs of producing a good or service decrease with increase in the level of output. costs sufficiently for firms to undertake production profitably. Reduction in cost when the scale of production increases.

Diseconomies of scale
Which means any further increase in the scale of

operations/production leads to rising cost per unit of output. Reasons: Specific Process. Output Increase.

Economies of Scale

Internal Economies

External Economies

Economies of scale
INTERNAL ECONOMIES

EXTERNAL ECONOMIES
Economies of

Technical Economies Managerial Economies Commercial Economies Financial Economies

Risk Bering Economies

Concentration Economies of Information Economies of Disintegration

Production function
The technological relationship between inputs and output . The production function is the technical relationship telling

the maximum amount of output capable of being produced by each and every set of specified inputs. It is defined for given set of technical knowledge. A real life production function is generally very complex and includes a wide range of inputs viz., (i) land and building (ii) labour including manual labour, engineering staff and production manager (iii) capital (iv) raw material (v) time and (vi) technology The long run production function is generally expressed as Q = f (LB, L, K, M, T, t)

The Production Function

Basic concepts : Short run & Long run

Long run: The shortest period of time required to alter the

amounts of all inputs used in a production process.

Short run: The longest period of time during which at least

one of the inputs used in a production process cannot be

varied.
Variable input: An input that can be varied in the short run. Fixed input: An input that cannot vary in the short run.

Short-run Production Function

Three properties: It passes through the origin Initially the addition of variable inputs augments output an increasing rate Beyond some point additional units of the variable input give rise to smaller and smaller increments in output.

Short-run Production Function

Law Of Diminishing Returns: If an increasing amounts of a

variable factor are applied to a fixed quantity of other factors per unit of time, the increments in total output will first increase but beyond some point, it begins to decline
Based On Following Assumption:
Time. Only One Variable Factor.

No Change In Efficiency.
No New Technology.

Long Run Production Function

Isoquant Curve or Equal Product Curve:

The isoquant curve is the locus of points showing that different combinations of factor-inputs give the same quantity of output.
Marginal rate of technical substitution (MRTS):

The rate at which one input can be exchanged for another without altering the total level of output.

Properties of Isoquant Curve

Slope Downward. Convex To The Point Of Origin. No Intersection.

Returns To Scale
Increasing returns to scale: The property of a production

process whereby a proportional increase in every input yields a more than proportional increase in output.
Constant returns to scale: The property of a production

process whereby a proportional increase in every input yields an equal proportional increase in output.
Decreasing returns to scale: The property of a production

process whereby a proportional increase in every input yields a less than proportional increase in output.

Cost and Profit Forecasting

Forecasting, particularly on a short-term basis (one year

to three years), is essential to planning for business success. This process, estimating future business performance based on the actual results from prior periods, enables the business owner/manager to modify the operation of the business on a timely basis. This allows the business to avoid losses or major financial problems should some future results from operations not conform with reasonable expectations.

Approaches to Forecasting
Spot Projection:

Prediction of the entire income statement for a specified future period by forecasting each important element separately.
Breakeven analysis:

Determination of the functional relation of the both revenue & cost to output rate, and derivation of the functional relation of profits to output as a residual.
Environmental analysis:

Determination of the relation of the companys profit to key variables in its economic environment.

Break Even Analysis

Definition: Method of studying the relationship among sales, revenue, expenditure, variable cost & fixed cost to determine the level of operation at which all the costs are equal to the sales revenue and there is no profit and no loss situation.

Break-even analysis is a technique widely used by production management and management accountants. It is based on categorizing production costs between "variable " and "fixed costs . Analytical tool to determine probable level of operation It is an important technique which is used for profit planning and managerial decision making.

Breakeven point:

Revenue is exactly equal to costs. No profit is made and no losses are incurred. Defines when an investment will generate a positive return.

Profit-If production is beyond this level

(i.e. Breakeven point) &

Loss- If it is decreased from this level

Formula:

Break Even Point = Fixed Costs / (selling price-variable costs)

Calculation of Break Even Point

Assume the following (in rupees): Fixed Costs: Monthly Rent = 100 Insurance = 50 Total Monthly Fixed Costs = 150 Variable Cost: Materials = 3 Labor = 4 Total Variable Cost = 7 Selling Price: = 10 Break Even Point Calculation Break Even Point = Fixed Costs / (selling price - variable costs) = 150 / (10-7) = 150 / 3 = 50 To break even the company must sell 50 units per month.

Two Types Of Cost

Fixed Costs:

Cost that do not change when production or sales levels do change. Summarized for a specific time period (generally one month). Eg: rent, property tax, insurance, or interest expense.

Variable Cost:

Variable costs are costs directly related to production units. Eg: costs include direct labor and direct materials. Total Variable costs + Fixed costs = total cost of production.

Selling Price:

The price that a unit is sold for.

Advantages
Easy to understand and use. Profit and loss is easy to calculate at different levels of output.

The impact of a change to cost & price can be measured by changing TC lines

& TR lines respectively. Points out the relationship between cost, production volume and returns It is cheap to carry out. Provides a simple picture of a business.

Disadvantages
Assumes that all output is sold. Is too simplistic. Analysis of one product at a time. Difficult to classify a cost as all variable or as all fixed cost.