SUPPLY definition: Supply means the quantity offered for sale by sellers at particular prices, during a certain period of time. First factor affecting price is demand. Second factor affecting price is supply. The supply of a commodity is not the entire stock of it in existence. It is only that quantity that is drawn into the market by the price ruling at the time. eg. the supply of crude oil is not the estimated resources of all the world's oil field. It is the quantity that is drawn into the market by the price ruling at the time. Supply depends upon scarcity. Demand depends upon usefulness. Supply price: Price required to attract purchasers for any given amount of a commodity is called the demand price for that amount at that time. Price required to call for the effort necessary for producing any given amount of a commodity is called the supply price for that amount during that time. LAW OF SUPPLY When the price of a good rises, and everything else remains the same, the quantity of the good supplied will also rise. Demand and supply Price of a lunch Supply offered by restaurants Demand from consumers Rs 12 0 250 Rs 15 30 200 Rs 25 60 140 Rs 35 60 60 Rs 45 90 50
Rs 65 120 40 Rs 80 150 20 Exceptions to law of supply: 1. In the labour market a rise in price (wages of labour) leads to fall in the amount of labour supplied. When wage increases, labourers work fewer hours, to earn the same income as before. So they may work less with a view to get some rest. 2. Under certain circumstances, supply is always fixed. An example is the pictures of a dead painter. The supply curve is a vertical straight line. Determinants of supply or Factors affecting supply Quantity supplied (Qs) is the total amount of a good that sellers would choose to produce and sell under given conditions. The given conditions include: Price If price rises -> production -> more profitable -> supply increases If price falls -> production -> less profitable -> supply decreases Cost of production Changes in 1) raw materials 2) wage rates 3) labour productivity 4) taxation Technical knowledge - progress of technology (eg. printer) Improves quality Reduces cost Better machines to produce fast Computer saves administration cost e-mail faster and better communication, etc Environment Agricultural commodities depends on 1) Monsoons 2) Flood 3) Drought 4) Natural calamities Level of income of producers Because the price of agricultural products increases cultivators consumes more of the foodstuffs & send less to the market
Firm s behavior If profit maximum objective Marginal revenue = marginal cost If sales maximum - objective Production increases & then supply increases Price of related goods Substitute price will affect this Government policy Policy and price subsidy. Eg: Fertilizers, sun control films, etc Weather conditions Failure of monsoon Sweeping changes in technology Plastic bags replaced by jute bags, Banana leaf. We refer to all of these, with the exception of the price of the good, as determinants of supply. Supply schedule: Supply schedule for a commodity shows the relationship between its market price and the amount of that commodity that all producers in the market are willing to produce and sell, other factors remains the same. Price Simply the construction of a list of prices at which a commodity can be supplied is known as supply schedule. Supply of bread (lakhs) 6 50 8 60 10 70 12 80 14 90 16 95 18 100 Supply schedule can be (i) individual supply schedule,
(ii) Market supply schedule. The former relates to the quantity that an individual firm or producer or supplier is willing and able to offer for sale at different prices. The market supply refers to the sum total of the quantities of a commodity offered for sale by different individual suppliers at different prices per unit of time. The following schedule makes the point clear: Price per kg S I S2 S3 S4 Total market supply 2.00 20 35 40 500 3.00 30 45 50 700 4.00 40 50 55 1000 5.00 45 55 60 1200 6.00 50 60 65 1500 Elasticity of supply: The elasticity of supply means, the responsiveness of the supply of a commodity to the changes in price. The supply, like the demand, is a function of price. The law of supply expresses the price supply relationship. It is usually observed that the price and supply are directly related, which means that more is supplied at a high price and less at a low price. It may be noticed that though most of the commodities follow the law of supply, the degree of response varies from commodity to commodity. Some commodities are more responsive to a change in price, while certain others are less responsive. Accordingly, we come across commodities having more elastic supply and those having less elastic supply. The elasticity of supply can be expressed in the form of a formula as follows: Price Elasticity of Supply (Es) = Change in Quantity Supplied Change in Price
If the price of a machine rises from Rs 4000 per unit to Rs 4100 per unit and in response to this increase in price, the quantity supplied rises from 5000 to 5500 units, calculate the elasticity of supply. e s = 500 x 4000 = 4 100 5000 The price of an article rises from Rs 400 to Rs 500 and the supply rises from 2000 to 3000. Calculate the elasticity of supply. e s = 1000 x 400 = 2 100 2000 Various types of elasticity of supply can be mentioned: Under this method five different situations of Price Elasticity can be described as follows:- 1. Unitary Elastic supply or Es=1 In this situation the supply curve slopes upward in a straight line which starts from point of origin. This shows the percentage change in Quantity supply is exactly equals to percentage change in price. 2. Relatively elastic supply or Es 1 When a straight line upward sloping curve starts from Y-axis, then this is a case of Unitary Elasticity. This depicts that percentage change in quantity supplied is greater than percentage change in price. 3. Relatively inelastic supply or Es 1 When a straight line upward sloping curve starts from X-axis then this is a case of less than Unitary Elasticity. This represents that percentage change in quantity supplied is less than percentage change in price.
4. Perfectly Inelastic Supply or Es = 0 It is a situation where there is no change in supply regardless of change in price. It shows that supply remain unchanged with the change in price. In such situation supply curve is vertical straight line curve. Necessities are inelastic because we need them: water, food, shelter, etc. 5. Perfectly Elastic Supply or Es = In this situation supply is infinite corresponding to a particular price of the commodity. Accordingly a slightest fall in price caused an infinite change in supply, reducing it to zero. In this case supply curve is horizontal straight line. They can be luxuries, accessories, non-essential clothing, etc. If the price of ipads suddenly doubled, the demand would respond in the opposite manner and likely to an even greater degree. Types of Elasticity of Supply Coefficient of Elasticity of Supply Verbal Description Perfectly elastic supply infinite Sellers sell at the same price Perfectly inelastic supply 0 Quantity supplied not changing as prices changed Relatively elastic supply Greater than 1 Quantity supplied changing by a larger % than price Relatively inelastic supply Less than one Quantity supplied changing by a smaller % than price Unitary elastic supply 1 Quantity supplied changing by the same % as price COST Definition: Cost is defined as the amount of expenditure incurred on a given thing. Types: 1. Actual cost 2. Economics cost 3. Opportunity cost 4. Sunk costs 5. Fixed costs 6. Variable costs 7. Marginal cost 8. Incremental cost 9. Short run costs 10. Long run costs 11. Historical and Replacement costs Actual cost:
The amount spent for producing a product. This includes wages materials transportation salaries power Economics cost includes the resources owned by the firm as well as those hired from outside A) Explicit cost -> out-of-pocket costs ie) payment to outside the firm B) Implicit costs -> book cost or non-cash costs refers to the payment Opportunity cost Cost of alternatives foregone. If we produce one commodity, we do not produce another. eg. If we have an acre of land and produce potatoes, we get Rs 1000. If we have produced rice we could have got Rs 2000. Sunk costs Costs of the past - forfeited Fixed costs Capital Rent on leased buildings Cost of plant Equipments Deprecation Wages and salaries of permanent employees Interest on borrowings
Variable costs Cost of raw materials Wages and salaries of the temporary employees Costs of all other output that vary with output Marginal cost On account of producing an additional unit of the product Incremental cost Increasing the output by one or more units Arise owing to A)change in production line B)introduction of new product C)replacement of old technique of production D)replacement of worn out plant Short run costs Costs within the given production capacity, the size of the firm remains the same Long run costs all costs including fixed assets like plant, building machinery etc become variable costs Historical and Replacement costs asset acquired in the past replacing the same asset for future
Elements of cost 1. Material 2. Labour 3. Expense Material cost cost of commodities supplied to an undertaking 1. direct material cost 2. indirect material cost direct material cost A direct material is one which goes into a saleable product or its use is directly essential for the completion of the product. eg. HSS bit for making a turning tool for a lathe. Fe, Ni, Cr etc for making alloy steel. The amount spent on direct material is called direct material cost. Indirect material cost An indirect material is one which is necessary in the production process, but is not directly used in the product. eg. cotton waste, greases, oils, sand paper. The cost associated with indirect material is called indirect material cost. Labour cost 1. direct labour cost 2. indirect labour cost Direct labour cost Cost of labour that is directly linked to the manufacture of the product. o wages o wages of a welder fabricating a structure A direct labourer is one who converts the direct material to saleable product. Indirect labour cost Cost of labour that cannot be directly linked to the manufactured product. o maintenance men, helpers, machine setters, supervisors, foremen
Expenses All charges, other than those incurred as direct result of labourers and materials cost of services provided and cost of use of owned assets o Direct expenses o Indirect expenses Direct expenses Expenses which can be identified and allocated to cost centres or cost units o cost of design layouts, designs or drawings o hiring of special or single purpose machine tools or other equipment to complete a particular production order Indirect expenses Expenses which cannot be allocated to a particular cost centres but can be apportioned or absorbed by the cost centres. o rent of the building, insurance premium, telephone bills fixed expenses o Those costs that remain constant irrespective of production volume Taxes on land and building Depreciation arising from time rent Variable expenses o Expenses that vary directly with the volume of production Royalties paid on volume basis (number of CDs sold) Depreciation arising from use Overheads other names: indirect costs, overheads, on-cost, burden All expenses other than direct expenses overheads = cost of indirect material + indirect labour + indirect expenses groups or subdivisions o production or manufacturing overheads o administration overheads o selling overheads o distribution overhead o R&D overhead Production and manufacturing overhead includes all indirect expenses from the receipt of production order till its completion (ready for despatch to customer) building expenses - rent, insurance, repair, heating and lighting, depreciation
indirect labour - supervisors and foremen, machine setters, general workers, maintenance men, shop clerk, shop inspectors etc water, fuel and power (steam, gas, electric, pneumatic, hydraulic) Consumable stores (cotton waste, grease etc) Plant maintenance and depreciation sundry expenses - employment office, security, welfare, recreation, rest room Administration overheads Consists of expenses in the direction, control, administration of an enterprise Expenses of providing general management and clerical services. office rent, salaries of clerks, director's & general manager's fees, insurance, legal costs, rates and taxes, postage and telephones, audit fees, bank charges Selling overheads Expenses in order to maintain and increase the volume of sales Expenses direct or indirect necessary to persuade a consumer to buy advertising, salaries and commission to sales manager, travellers, agents, rent of sales rooms and offices, consumer service, service after sales Distribution overhead Expenses for transporting the products to customers and storing them when necessary. warehouse charges, Cost of transporting goods to warehouses, loading and unloading charges, upkeep and running of delivery vehicles, salaries of clerks and labourers, depreciation. Research and Development overheads depends on the size of R&D department Prime Cost Prime cost = Direct Material cost + Direct labour cost + (variable) direct expenses Works or Factory cost Factory cost = prime cost + factory overheads
= Direct Material cost + Direct labour cost + (variable) direct expenses + factory overheads Total cost = Factory cost + selling overhead + distribution overhead + administration overhead Selling price = Total cost ± profit or loss Objectives of good costing system: 1. To ascertain the cost of production of every unit, job, operation process, department and service. 2. Indicate to management any inefficiency and the extent of waste (material, time, expense, use of machine, equipment and tools) 3. Disclose profitable and unprofitable activities. This can help to take steps to eliminate or reduce these activities, change the method of production to make them more profitable. 4. Provides actual figures of cost for comparison with estimates. This provides the management in their price fixing policies. 5. It provides cost data for different periods, volumes of production. This helps the management in budgetary control. 6. It records and reports to the manager how the actual cost compares with standard cost. 7. Indicates the exact cause of increase or decrease in profit or loss. 8. It provides data for comparing the costs within the firm and between similar firms. From the following data find a) material cost b) Prime cost c) direct cost d) Factory cost e) Administrative overheads f) cost of production g) selling and distribution overheads h) total cost and cost of sales i) selling price. Assume a net profit of Rs 10000. No Description Rs 1 Material on hand (Apr 1, 1975) 60000 2 New material purchased 250000 3 Directors fees 3500 4 Advertising etc 12000 5 Depreciation on sales department car 1200 6 Printing and stationary charges 300 7 Plant depreciation 5000 8 Wages of direct workers 70000
9 Wages of indirect (factory) workers 10000 10 Rent of factory building 5000 11 Postage, telephone and telegraph 200 12 Water and electricity for factory 1000 13 Office salaries 2000 14 Rent of the office 500 15 Rent of the show room 1500 16 Commission of salesmen 2500 17 Sales department car expenses 1500 18 Material on hand (Mar 31, 1976) 50000 19 Variable direct expenses 750 20 Plant repair and maintenance 3000 21 Heating, lighting and water for office use 2500 22 Cost of distributing goods 2000 (a) material cost = Cost of material on hand on Apr 1, 1975 - Cost of material on hand on Mar 31, 1976 + Cost of new material purchased = 60000-50000 + 250000 = Rs 260000 (b) Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses = 260000 + 70000 + 750 = Rs 330750 (c) Direct cost = same as prime cost (d) Factory cost = Prime cost + factory or production overhead (sum of 7, 9,10,12 & 20) = 330750 + 5000 + 10000 + 5000 + 1000 + 3000 = Rs 354750 (e) Administrative overheads = sum of 3, 6, 11, 13, 14 & 21 = 3500 + 300 + 200 + 2000 + 500 + 2500 = Rs 9000 (f) Cost of production = Factory cost + Administrative overheads = 354750 + 9000 = Rs 363750 (g) Selling and distribution overheads = sum of 4, 5, 15, 16, 17 & 22 = 12000 + 1200 + 1500 + 2500 + 1500 + 2000
= Rs 20700 (h) Total cost or cost of sales = Cost of production + Selling and distribution overheads = 363750 + 20700 = Rs 384450 (i) Selling price = Cost of sales + Profit = 384450 + 10000 = Rs 394450 A factory producing 150 electric bulbs a day, involves direct material cost of Rs 250, direct labour cost of Rs 200 and factory overheads of Rs 225. Assuming a profit of 10% of the selling price and selling on cost (overheads) 30% of the factory cost, calculate the selling price of 1 electric bulb. Factory cost = direct material cost + direct labour cost + factory overheads = 250 + 200 + 225 = Rs 675 total cost = factory cost + selling overhead = 675 + 675 x 30/100 = Rs 877.50 total cost = selling price - profit = sp - sp x 10/100 877.50 = sp - sp x 10/100 SP = Rs 975 Selling price of 1 bulb = 975/150 = Rs 6.50 A cast iron foundry employs 30 persons. It consumes material worth Rs 25000, pays workers at the rate of Rs 10 per hour and incurs total overhead of Rs 10000. In a particular month (25 days) workers had an overtime of 150 hours and were paid at double the normal rate. Find i) the total cost and ii) the man hour rate of overheads. Assume an 8 hour working day. i) Total cost Labour cost Overtime expenses = (number of working hours per month) x (rate of payment per hour) = (25x8x30)x(10) = Rs 60000 = Rs 150x20 = Rs 3000 Total labour cost = Rs 60000 + 3000 = Rs 63000. Prime cost = direct material cost + direct labour cost + (variable) direct expenses = Rs 25000 + Rs 63000 = Rs 88000 Factory cost = prime cost + factory overheads Total cost = Factory cost + selling overhead + distribution overhead + administration overhead = prime cost + total overheads
= Rs 88000 + Rs 10000 = Rs 98000 ii) Man hour rate of overhead = Total overhead Number of total man hours put = Total overhead regular man hours + overtime man hours = Rs 10000 / (25x8x30 + 150) = Rs 1.627 Two molders can cast 25 gears in a day. Each gear weighs 3 Kg and the gear material costs Rs 12.50 per Kg. If the overhead expenses are 150% of direct labour cost and two molders are paid Rs 70 per day, calculate the cost of producing one gear. Total cost = Material cost + labour cost + overheads = (25x3x12.5) + (70) + (70x150/100) = Rs 1112.50 Cost per gear = Total cost No. of gears = 1112.50/25 = Rs 44.50 Calculate the selling price of one fountain pen from data given below: No. of fountain pens produced 135 Labour cost Rs 200 Material cost Rs 160 Factory overheads Administration and selling overheads Profit 35 % of prime cost 20 % of factory cost 10 % of total cost Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses
= 160 + 200 = Rs 360 Factory cost = Prime Cost + factory overheads = 360 + 360x35/100 = Rs 486 Total Cost = Factory cost + selling overhead + distribution overhead + administration overhead = 486 + 486x20/100 = Rs 583.20 Selling price of 135 pens = Total cost + profit = 583.20 + 583.20x10/100 = Rs 641.52 Selling price of one pen = Selling price of 135 pens 135 = 641.52/135 = Rs 4.75 A drill press costs Rs 6000. A discount of 25% of this price is given to the distributor. If labour cost, material cost and factory overheads are as 4:1:2; and selling expenses are 25% of the factory cost, calculate the profit of the factory for one drill press. Assume factory overheads of Rs 800. labour cost : material cost : factory overhead = 4:1:2 factory overhead = Rs 800 Let labour cost + material cost + factory overhead = P factory overhead = Rs 800 = (2/7) P P = 800x(7/2) = 2800 material cost = (1/7)xP = (1/7)x2800 = Rs 400 labour cost = (4/7)xP = (4/7)x2800 = Rs 1600 Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses = 400 + 1600 = Rs 2000 Factory cost = Prime Cost + factory overheads = 2000 + 800 = Rs 2800 Total Cost = Factory cost + selling overhead + distribution overhead + administration overhead = 2800 + 2800x25/100 = Rs 3500 Selling price = Cost of press - discount = 6000-6000x25/100 = Rs 4500 Selling Price = Total cost + profit 4500 = 3500 + Profit Profit = Rs 1000 A factory is making a pipe fitting by (a) casting and (b) forging. The cost data is as follows:
Description Casting Forging Material cost per piece Rs 2 Rs 2 Labour rate Re 0.80 per hour Re 0.80 per hour Time required to make one fitting 3 hours 48 minutes Overheads 25% of labour cost 150% of labour cost Calculate & compare the total cost of each pipe fitting in the two cases. Casting: Labour cost = (Labour rate) x (Time required to make one fitting) = 0.80x3 = Rs 2.40 Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses = 2 + 2.40 = Rs 4.40 Total cost = Prime cost + overheads = 4.4 + (2.40x25/100) = Rs 5 per piece Forging: Labour cost = (Labour rate) x (Time required to make one fitting) = 0.80x48/60 = Rs 0.64 Prime Cost = Direct material cost + Direct labour cost + (variable) direct expenses = 2 + 0.64 = Rs 2.64 Total cost = Prime cost + overheads = 2.64 + (0.64x150/100) = Rs 3.60 per piece Hence forging is economical when compared to casting for making a pipe fitting Ascertain the prime cost, work cost, cost of production and total cost and profit from the following information: Description Rs Direct material 7000 Direct labour 2800 Factory expenses 2600 Administrative expenses 1000 Selling expenses 900 Sales 20000 Prime cost Work cost Cost of production = Direct material + direct labour = 7000 + 2800 = Rs 9800 = Prime cost + factory expenses = 9800 + 2600 = Rs 12400 = Work cost + Administrative expenses = 12400 + 1000 = Rs 13400
Total cost Profit = Cost of production + Selling expenses = 13400 + 900 = Rs 14300 = Sales - Total cost = 20000-14300 = Rs 5700