## Fixed cost

**fixed cost**is a

**cost**that does not change with an increase or decrease in the amount of goods or services produced or sold.

**Fixed costs**are expenses that have to be paid by a company, independent of any business activity.

Examples | Depreciation, Rent, Salary, Insurance, Tax etc. |

## What is a ‘Variable Cost’

Variable costs are those costs that vary depending on a company’s production volume; they rise as production increases and fall as production decreases.

Examples Material Consumed, Wages, Commission on Sales, Packing Expenses, etc.

### Difference Between Fixed Cost and Variable Cost

BASIS FOR COMPARISON | FIXED COST | VARIABLE COST |
---|---|---|

Meaning | The cost which remains same, regardless of the volume produced, is known as fixed cost. | The cost which changes with the change in output is considered as a variable cost. |

Nature | Time Related | Volume Related |

Incurred when | Fixed costs are definite, they are incurred whether the units are produced or not. | Variable costs are incurred only when the units are produced. |

Unit Cost | Fixed cost changes in unit, i.e. as the units produced increases, fixed cost per unit decreases and vice versa, so the fixed cost per unit is inversely proportional to the number of output produced. | Variable cost remains same, per unit. |

Behavior | It remains constant for a given period of time. | It changes with the change in the output level. |

Combination of | Fixed Production Overhead, Fixed Administration Overhead and Fixed Selling and Distribution Overhead. | Direct Material, Direct Labor, Direct Expenses, Variable Production Overhead, Variable Selling and Distribution Overhead. |

Examples | Depreciation, Rent, Salary, Insurance, Tax etc. | Material Consumed, Wages, Commission on Sales, Packing Expenses, etc. |

Diagram:-

Marginal cost

In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good.

**Cost Estimating and Estimating Models**

**per-unit model**is a simple but useful model in which a cost estimate is made for a single unit, then the total cost estimate results from multiplying the estimated cost per unit times the number of units.

**segmenting model**partitions the total estimation task into segments. Each segment is estimated, then the segment estimates are combined for the total cost estimate.

**Cost indexes**can be used to account for historical changes in costs. The widely reported Consumer Price Index (CPI) is an example. Cost index data are available from a variety of sources. Suppose A is a time point in the past and B is the current time. Let IV

_{A}denote the index value at time A and IV

_{B}denote the current index value for the cost estimate of interest. To estimate the current cost based on the cost at time A, use the equation:

_{B}/ IV

_{A}).

**power-sizing model**accounts explicitly for economies of scale. For example, the cost of constructing a six-story building will typically be less than double the construction cost of a comparable three-story building. To estimate the cost of B based on the cost of comparable item A, use the equation

^{x}

**Learning curve**cost estimating is based on the assumption that as a particular task is repeated, the operator systematically becomes quicker at performing the task. In particular, the model is based on the assumption that the time required to complete the task for production unit 2x is a fixed percentage of the time required for production unit x for all positive, integer x. The learning curve slope indicates “how fast” learning occurs. For example, a learning curve rate of 70% represents much faster learning than a rate of 90%. If an operator exhibits learning on a certain task at a rate of 70%, the time required to complete production unit 50, for example, is only 70% of the time required to complete unit 25.

= log (learning curve rate in decimal form) / log 2.0

_{N}= time estimate for unit N (N = 1, 2, …)

= (T

_{1}) (N)

^{b}

_{1}is the time required for unit 1.

^{t}unit is 65 seconds. What is the operator’s time for the 50

^{th}unit?

_{100}= T

_{1}* (50) ^ b = 65 * (50) ^ -0.5145 = 8.68 min

**cost index**

**cost index**is the

**ratio**of the actual price in a time period compared to that in a selected base period (a defined point in time or the average price in a certain year), multiplied by 100.

## How does this PVIFA calculator work?

*PVIFA calculator*uses the formula explained here and it requires the interest rate and the number of periods to be given:

## PVIFA definition

**simple interest formula**: A = P(1 + rt) where P is the Principal amount of money to be invested at an

**Interest Rate**R% per period for t Number of Time Periods.

**Net present value (NPV)**is the present value of an investment‘s expected cash inflows minus the costs of acquiring the investment.

The formula for NPV is: NPV = (Cash inflows from investment) – (cash outflows or costs of investment)

What is the ‘Present Value Interest Factor – PVIF’

## BREAKING DOWN ‘Present Value Interest Factor – PVIF’

# Equivalent Annual Annuity

## Present Worth Analysis

## Sensitivity Analysis

## Future worth Analysis

## Explain P/V ratio and Contribution.

**P/V Ratio:**

**Contribution:**

## Explain Break Even Point. How does BEP help in making business decision?

## Explain Margin of Safety.

## What is ‘Net Present Value – NPV’

_{t}= net cash inflow during the period t

_{o }= total initial investment costs

## Drawbacks and Alternatives

# What is the difference between the net present value and the internal rate of return?

**NPV**: NPV is a capital budgeting technique which explains the difference between the Present value of future cash flows and Initial cash outlay on the project. Basically it explains about the surplus on the project. Accept the project with positive NPV & Reject the project with negative NPV.

**IRR:**Basically IRR is a discount rate which is used to find out the result that where the NPV equals to zero. It should be compared with the cost of capital of the company to accept or reject the project. But IRR should be greater than the cost of capital to execute the project.

## What is salvage value?

## compound interest formula

#### Formula:

Total Amount = Principal + CI (Compound Interest)

a. Formula for Interest Compounded Annually Total Amount = P(1+(R/100))^{n}

b. Formula for Interest Compounded Half Yearly Total Amount = P(1+(R/200))^{2n}

c. Formulae for Interest Compounded Quarterly Total Amount = P(1 + (R/400))^{4n}

d. Formulae for Interest Compounded Annually with fractional years (e.g 2.5 years) Total Amount = P(1 + (R/100))^{a} x (1+(bR/100)) here if year is 2.5 then a =2 and b=0.5

e. With different interest rates for different years Say x% for year 1, y% for year 2, z% for year 3

Total Amount = P(1+ (x/100)) x (1+(y/100)) x (1+(z/100)) **Where,** CI = Compound Interest, P = Principal or Sum of amount, R = % Rate per annum, n = Time Span in years