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• Advanced Cost Concepts 1. Economies of Scale Cost advantages achieved by increasing production. Types: Internal (e.g., bulk purchasing), External (e.g., industry-wide benefits). 2. Diseconomies of Scale Increased costs due to inefficiencies in large-scale operations. 3. Fixed-to-Variable Cost Ratio Analyzing cost structure to determine flexibility and risk. 4. Incremental Costs Costs incurred due to additional production. 5. Absorption vs. Variable Costing Absorption Costing: Includes all fixed and variable costs in product cost. Variable Costing: Only variable costs included in product cost. • Cost Reduction Strategies 1. Operational Efficiency Streamline workflows and automate repetitive tasks. 2. Supplier Negotiations Negotiate better rates or bulk discounts. 3. Outsourcing Reduce fixed costs by outsourcing non-core tasks. 4. Energy Efficiency Invest in energy-saving equipment to lower utility costs. 5. Inventory Optimization Implement just-in-time (JIT) inventory systems to reduce storage costs. 6. Lean Production Minimize waste during manufacturing processes. 7. Regular Cost Audits Identify and eliminate unnecessary expenses. • Main Cost Management Metrics 1. Cost Efficiency Ratio Measures the efficiency of cost usage. Efficiency Ratio = Total Costs ÷ Revenue × 100 2. Cost Variance (CV) Difference between estimated and actual costs. CV = Budgeted Cost - Actual Cost 3. Gross Margin Gross Margin = (Revenue - COGS) ÷ Revenue × 100 4. Operating Margin Operating Margin = (Operating Income ÷ Revenue) × 100 • Practical Examples 1. Scenario 1: Break-Even Analysis A startup with ₹50,000 fixed costs produces 1,000 units at a variable cost of ₹200/unit. Selling price is ₹300/unit. BEP: ₹50,000 ÷ (₹300 - ₹200) = 500 units 2. Scenario 2: Marginal Cost Analysis A bakery incurs ₹2,000 in costs to produce 100 cakes. Producing an additional cake costs ₹20. MC: ₹20 per cake 3. Scenario 3: Opportunity Cost Choosing between investing ₹1,00,000 in marketing (expected revenue: ₹5,00,000) or a new product launch (expected revenue: ₹4,50,000). Opportunity Cost: ₹50,000 • Tips and Tricks for Cost Management 1. Track costs regularly using accounting software like QuickBooks or Zoho Books. 2. Distinguish between necessary and unnecessary expenses. 3. Always calculate the ROI before incurring significant costs. 4. Negotiate long-term contracts with suppliers for stability. 5. Focus on high-margin products to maximize profitability