UNIT –I

DEMAND FORECASTING AND ELEMENTS

OF COSTS
 Macro and micro  Elements of cost
economics  Determination of Material
 Demand and supply cost
 Factors influencing  Labour cost
demand  Expenses
 Elasticity of demand  Types of cost
 Cost of production
 Demand forecasting
 Overhead expenses
 Time series, Exponential Problems
smoothing casual forecast,
 Delphi method,
Regression, Barometric
method.
 Long run and Short run
forecast. UNIT -1 IE&M Demand Forecasting & Elements of Cost 1
Demand Forecasting
“An estimate of sales in dollars or physical
units for a specified future period under a
proposed marketing plan.”
American Marketing Association
Demand forecasting is the scientific and
analytical estimation of demand for a product
(service) for a particular period of time.
It is the process of determining how much of
what products is needed when and where.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 2

Importance of
forecasting
• Production planning.
• Sales forecasting.
• Control of business.
• Inventory control.
• Growth and long-term investment
programs.
• Stability.
• Economic planning and policy making.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 3

Factors involved in demand
forecasting
• Time period.
• Levels of forecasting.
• Purpose – General or Specific.
• Methods of forecasting.
• Nature of commodity.
• Nature of competition.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 4

Objectives of demand
forecasting
• Helping continuous production.
• Regular supply of commodities.
• Formulation of price policy.
• To formulate effective sales
performance.
• Arrangement of finance.
• To determine productive capacity
• Labour requirements.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 5

Activity#1
Case study on any company’s product
launch and How and when did the
company forecasted the demand of
the customers and their success story.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 6

Levels of
forecasting
• Micro level:- It refers to demand
forecasting by individual business firm
for estimating the demand for its
product.
• Industry level:- It refers to the demand
estimate for the product of the industry
as whole. It relates to market demand as
whole.
• Macro level:- It refers to the aggregate
demand for the industrial output by
nation as whole. It is based on the
national income or aggregate expenditure
of the country.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 7
Types of
forecasting
• Short term forecasting:- is for a short period up to one
year. It relates to policies regarding sales, purchases,
pricing and finance. In most of firms the information
regarding the immediate future is necessary for
formulating a suitable production policy.
• Medium term forecasting:- it is an intermediate
between short- term and long-term forecasting. This is
usually followed by a firm which is subjected to the
medium term variation in trade cycle.
• Long term forecasting:- refers to a period beyond one
year. The purpose of long term forecasting are:- 1)
planning of a new unit of expansion of the existing unit. A
multi-product firm must know not only total demand
situation, but also the demand for different items. 2)
Planning of man power needs. 3) Planning long term
financial requirements is necessary for the firm to make
necessary arrangements to secure fresh capital
investments. UNIT -1 IE&M Demand Forecasting & Elements of Cost 8
 2 MAIN CATEGORIES
MICROECONOMIC METHODS (QUANTITATIVE)

- involves the prediction of activity of particular firms,

branded products, commodities, markets, and
industries.
- are much more reliable than macroeconomic methods
because the dimensionality of factors is lower and often
can easily be incorporated into a model.
MACROECONOMIC METHODS (QUALITATIVE)
- involves the prediction of economic aggregates such as
inflation, unemployment, GDP growth, short-term
interest rates, and trade flows.
- is very difficult because of the complex
interdependencies in the overall economic factors
UNIT -1 IE&M Demand Forecasting & Elements of Cost 9
QUALITATIVE METHODS
- SURVEY OF BUYERS INTENSIONS
- EXPERTS OPINION METHOD/DELPHI METHOD
- MARKET EXPERIMENTATION METHOD
- COLLECTIVE OPINIONS METHOD
QUANTITATIVE METHODS
- TIME SERIES MODELS
-TREND ANALYSIS
- MOVING AVERAGES METHODS
- EXPONENTIAL SMOOTHING

- CAUSAL MODELS UNIT -1 IE&M Demand Forecasting & Elements of Cost 10

Qualitative Method
Forecasting
1. Experts’ Opinion Method
i)Group Discussion: (developed by Osborn in
1953) Decisions may be taken with the help of
brainstorming sessions or by structured
discussions.
ii)Delphi Technique: developed by the Rand
Corporation at the beginning of the Cold War,
to forecast impact of technology on warfare.
 Way of getting repeated opinion of
experts without their face to face
interaction.
 Consolidated opinions of experts is
sent for revised views till conclusions
converge on a point.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 11
Merits
 Decisions are enriched with the
experience of competent experts.
 Firm need not spend time, resources

in collection of data by survey.

 Very useful when product is absolutely

new to all the markets.

Demerits
 Experts’ may involve some amount of

bias.
 With external experts, risk of loss of

confidential information to rival

firms.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 12
2. Consumers’ Opinion Survey
 Buyers are asked about future buying
intentions of products, brand preferences
and quantities of purchase, response to an
increase in the price, or an implied
comparison with competitor’s products.
 Census Method: Involves contacting
each and every buyer
 Sample Method: Involves only
representative sample of
buyers
UNIT -1 IE&M Demand Forecasting & Elements of Cost 13
Merits
 Simple to administer and comprehend.

 Suitable when no past data available.

 Suitable for short term decisions regarding

product and promotion.
Demerits
 Expensive both in terms of resources and
time.
 Buyers may give incorrect responses.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 14
 Forecasting
3. Sales Force Opinion Survey
Salespersons are in direct contact with
the customers. Salespersons are asked
about estimated sales targets in their
respective sales territories in a given
period of time.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 15

Merits
 Cost effective as no additional cost is incurred
on collection of data.
 Estimated figures are more reliable, as they are
based on the notions of salespersons in direct
contact with their customers.
Demerits
 Results may be conditioned by the bias of
optimism (or pessimism) of salespersons.
 Salespersons may be unaware of the
economic environment of the business and
may make wrong estimates.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 16

4. Market Simulation
 Firms create “artificial market”, consumers are
instructed to shop with some money. “Laboratory
experiment” ascertains consumers’ reactions to
changes in price, packaging, and even location of
the product in the shop.
 Grabor-Granger test:
Half of members are shown new product to see
whether they would actually buy it at various prices
on a random price list and then are shown the
existing product. Other half is shown the existing
product first and then the new product to ascertain
if a product would be bought at different prices.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 17

Merits
 Market experiments provide information on
consumer behaviour regarding a change
in any of the determinants of demand.
 Experiments are very useful in case of an
absolutely new product.
Demerits
 People behave differently when they are
being observed.
 In Grabor-Granger tests consumers may not
quote the price they may pay.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 18
b. Test Marketing
 Involves real markets in which
consumers actually buy a product
without the consciousness of being
observed.
 product is actually sold in certain
segments of the market, regarded as
the “test market”.
 Choice and number of test market(s)
and duration of test are very crucial
to the success of the results.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 19
Merits
 Most reliable among qualitative methods.
 Very suitable for new products.
 Considered less risky than launching the
product across a wide region.
Demerits
 Very costly as it requires actual production of the

product, and in event of failure of the product the

entire cost of test is sunk.
 Time consuming to observe the actual buying
pattern of consumers.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 20

Quantitative Methods of Demand
Forecasting
Trend Projection
Statistical tool to predict future values of a
variable on the basis of time series data.
 Time series data are composed of:
 Secular trend (T): change occurring consistently
over a long time and is relatively smooth in its
path.
 Seasonal trend (S): seasonal variations of the
data within a year
 Cyclical trend (C): cyclical movement in the
demand for a product that may have a tendency to
recur in a few years
 Random events (R): have no trend of occurrence
UNIT -1 IE&M Demand Forecasting & Elements of Cost 21
 Quantitative Methods:
Methods of Trend Projection

 Graphical method
 Past values of the variable on vertical axis
and time on horizontal axis and line is
plotted.
 Movement of the series is assessed and

future values of the variable are forecasted

 simple but provides a general indication

and fails to predict future value of

demand

UNIT -1 IE&M Demand Forecasting & Elements of Cost 22

 Quantitative Methods: Methods
of Trend Projection
Least squares method
 based on the minimization of squared deviations
between the best fitting line and the original
observations given.
 Estimates coefficients of a linear function.

Y=a+bX where a =intercept

and b =slope
 The normal equations:

ΣY=na + bΣX
ΣXY= aΣX+ bΣX2
 Once the coefficients of the trend equation are
estimated, we can easily project the trend for
future periods.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 23
• YEAR SALES X X2 XY
• 1996 45 1 1 45
• 1997 52 2 4 104
• 1998 48 3 9 144
• 1999 55 4 16 220
• 2000 60 5 25 300
• N=5 ΣY=260 ΣX=15 ΣX2=55 ΣXY=813

UNIT -1 IE&M Demand Forecasting & Elements of Cost 24

Subsitituting the above values in the two
normal equations we get the following:-
260=5a+15b----------------
813=15a+55b-----------------
Solving both equation we get b=3.3
260=5a +15
260=5a+49.5
A=42.1
Therefore the equation for the line of best fit is
equal to:
Y=42.1+3.3X.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 25

Using this equation trend values for previous years and
estimates of sales for 2001. The trend values and
estimates are as follows:-
Y 1996 = 42.1 +3.3(1)= 45.4
Y 1997 = 42.1+3.3(2)= 48.7
Y 1998 = 42.1+3.3(3)= 52.2
Y 1999 = 42.1+3.3(4)=55.3
Y 2000 = 42.1+3.3(5)=58.6

Y 2001 = 42.1+3.3(6)=61.9. Based on the trend

projection equation illustrated above, the forecast
sales for the year 2001 is Rs 61.9 Lakhs.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 26
 Estimation of Trend by the Method of Least Squares
Q. The annual sales of a company are as follows:
Year 1991 1992 1993 1994 1995
Sales ‘000 45 56 58 46 75
Using the method of least squares, fit a st. line trend and estimate the annual
sales of 1997.
Year Sales 1990 = 0 x2 xy Estimated
Time-
Deviation Trend’000
y
x Y=45 +
5x
1991 45 1 1 45 50
1992 56 2 4 112 55
1993 78 3 9 234 60
1994 46 4 16 184 65
1995 75 5 25 375 70

n=5  y=  x=  x2 = 55  xy =
300 15 950
 n=5  y=
 x=  x2 = 55  xy = 950
300
15
 y  n.a. + b  x …1 St. line equation is Y = a + bx
xy = a x + b x2 …. 2
Substituting the values of a and b,
Substituting the computed values Y = 45 + 5x
we have, Therefore,
300 = 5a + 15b ….3 (x 3) Y1991 (x=1) = 45 + 5(1) = 50
950 = 15a + 55b …. 4 Y1992 (x=2) = 45 + 5(2) = 55
Multiplying (3) by 3 we have
Y1993 (x=3) = 45 + 5(3) = 60
900 = 15a + 45b
950 = 15a + 55b Y1994 (x=4) = 45 + 5(4) = 65
Therefore, 10b = 50, b=5 Y1995 (x=5) = 45 + 5(5) = 70
Substituting b = 5 in (3) Y1996 (x=6) = 45 + 5(6) = 75
300 = 5a + 15(5) Forecast for the year 1997
300 = 5a + 75
Y1997 (x=7) = 45 + 5(7) =
5a = 225 a = 45
80 i.e. Rs.80,000/-
Method of moving
averages.
• The trend Projection method is very popular in business
circles on account of simplicity and lesser cost. The basic idea
in this method is that past data serves a guide for future
sales.

• This method is inadequate for prediction whenever there are

turning points in the trend itself. While irregular factors such as
storms and strikes can be averaged out and contained into the
equation it is desirable to know how valuable such an exercise
could be. The following equation is used to determine the
demand
𝐷 using
+ 𝐷simple moving
+...+ 𝐷 average,
Ft – Forecast for the time period ‘t’.
  𝑡−1 𝑡 −2 𝑡 −𝑛
𝐹𝑡 = Dt – Demand for the time period ‘t’.
𝑛
n – moving period average.
 Simple Moving Average :
A XYZ refrigerator supplier has experienced the following demand for refrigerator
during past five months.
Find out the demand forecast for the month of July using five-period moving
average & three-period moving average using simple moving average method.
Month Demand
February 20
March   30
April 40
May 60
June 45

UNIT -1 IE&M Demand Forecasting & Elements of Cost 30

Advantages and
disadvantages
• This method is simple and can be
applied easily.
• It is based on mathematical calculations
and finally this is more accurate.
• The disadvantage of this method of
moving average is that it gives equal
weight age to the data related to different
periods in the past. It cannot be applied it
if some observations are missing.
Simple Exponential Smoothening

Used in cases where the variable under

forecast doesn’t follow a trend.
 𝐹 𝑡 +1 = 𝐹 𝑡 + ( 𝐷 𝑡 − 𝐹𝑡 ) 𝛼

 
Ft – Forecast for the time period ‘t’.

Dt – Demand for the time period ‘t’.

is the error in the previous year
– smoothening constant, 0

UNIT -1 IE&M Demand Forecasting & Elements of Cost 32

Exponential Smoothing :
One of the two wheeler manufacturing company exprienced irregular but usually
increasing demand for three products. The demand was found to be 420 bikes for June
and 440 bikes for July. They use a forecasting method which takes average of past  year to
forecast future demand. Using the simple average method demand forecast for June is
found as 320 bikes (Use a smoothing coefficient 0.7 to weight the recent demand most
heavily) and find the demand forecast for August.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 33

 Regression method
• The sales of any commodity depends on time.
• It may be associated with competitors, advertising
ones own advertising change in population,
income and size of familyand environmental
factors.
• The nature of relationship can be used and future
sales can be forecast.
• Regression analysis denotes methods by which the
relationships between quantity demanded and
one or more independent variable can be
estimated. It includes measurement of errors that
are inherent in the estimation process. Simple
regression is used when the quantity demanded is
estimated as a function of single independent
variable. Multiple regression analysis can be used to
Trend projection by regression
method
• This is a mathematical tool, with this adapting
“Method of least squares” a trend line can be
fixed to know the relationship between time and
demand/sales. Based on this trend line sales
/demand can be projected for future years.

• This is an inexpensive method of forecasting. The

data will be available with the organization and
based on this data demand or sales, can be
projected for future years.
 YEAR:-1998 1999 2000
2001 2002
SALES:- 240 280 240 300 340
YEAR SALES TIME TD PRODUCT
•DEVIATION SQUARED TIME DEVIATION
1998
• -2
24O 4 -480
• -1
1999 280 •0
1 -280 -
2000 240 • +1 0 760
2001 300 • +2 1 0
2002 340 4 300 +980
+680
X=5 Σy=1400 Σx=0 Σx2=10 Σxy=220
• The equation is y=a+bx.
• In this equation “a” and “b”.
• a=Σy/n=1400/5=280.
• b=Σxy/Σx2=220/10=22.
• Now applying values to regression
equation the equation will be
y=280+22x
• From this we can ascertain sales projection
from 2003, 2004, 2005.
• For the year 2003=280+22(3)=Rs. 346
crores.
• For the year 2004=280+22(4)=Rs. 368
crores.
• For the year 2005=280+22(5)=Rs. 390
crores.
Activity#3
Take any 4 product of any company
and find out its numbers of selling
units for past 5-6 years. Find the
Demand for the forthcoming years
using LSM of demand forecasting.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 38

Barometric
method
• Barometric method is an improvement over
trend projection method.
• In the trend projection method, the future is
some past extension of past while in the
barometric events, of the present are used to
predict the future.
• This is done by using certain economic and
statically indicators. The barometric techniques
use time series to predict variables.
• The barometric techniques using time series,
which when combined certain ways provide
direction of change in the economy or in
indicators. These are called barometers of
market change.
Simulation Method

• Every day life experience can not be mathematically explained

the model may become complicated and its solution will
become difficult in such a situation simulation method will be
helpful .this method is associated with the name of monte carla

• This method is used to solve the problem by trial and error

approach it is a device for studying an
artificial model of a physical or mathematical process ,this
method combines probability and sampling method to solve
complicated problem.
 Forecasting demand for new
products
• Evolutionary approach:- project the demand for new
product as an outgrowth and evolution of existing old
product. It may be assumed color T.V. picks up where
black and white T.V. sets are off. This approach is
useful only when the new product is very close to the
old product.
• Substitute approach:- According to this approach the
new product is to be considered as substitute for the
old product. For example the new Foto setter
substitutes photographic composition for established
type setting equipment as a linotype, polythene bags
as substitute for cloth bags or ball pens, or for
fountain pens.
• Growth curve approach:- The rate of growth and
ultimate level of demand for new products can be
estimated on the basis of pattern of growth for old
products. For example, analyze the growth curve of
the all household appliances and establish an
empirical law of market development applicable to
• Opinion polling approach:- Estimate the demand by
direct inquiry of the ultimate purchasers then blow
up the sample to full scale.
• Sending an engineer with drawing and specifications
for new industrial products to a sample company
is an example of opinion polling which is widely used
to explore the demand for new products.
• Sales experience approach:- The new product is
offered for sale in a sample market and then the
demand for new product is estimated in fully
developed market. The sample of market has to be
identified.
• Vicarious approach:- the consumer’s reactions are
indirectly studied in this approach. Specialized dealers
are contacted because they have intimate feel of the
customers. Dealers opinion are very much solicited
regarding the demand for new products. This approach
is easy but difficult to quantify.
Difficulties in
forecasting
• Changes in size and characteristics of
population
• Saturation limit of the market
• Existing stock of goods
• Constraints of the firm
Importance of demand
forecasting
• Useful for planning of production
• Sales forecasting depends upon demand
forecasting
• Useful for controlling inventories
• Helps in achieving targets of firm
• To stabilize production and employment
• Useful for policy making regarding long term
investment programmes
Criteria for good forecasting.

• Joel Dean lays down the following criteria of

good forecasting method:-
• Accuracy :- forecast must be accurate as far as
possible. Its accuracy must be judged by
examining the past forecast with present situation.
• Plausibility :- it implies management’s
understanding of method used for forecasting. It is
essential for a correct interpretation of the results.
• Simplicity :- a simpler method is always
more comprehensive than a complicated
one.
• Economy :- it should yield quick results. A time
consuming method may delay the decision
making process.
• Quickness :- it should yield quick results. A time
consuming method may delay the decision
making process.
• Flexibility : - not only the forecast is to be
maintained up to date there should be possibility
of changes to be incorporated in the relationships
entailed in forecast procedure, time to time.
BENEFITS OF EFFECTIVE DEMAND
FORECASTING
 Higher revenues
 Sales maximization
 Reduced investments for safety stocks
 Improved production planning
 Early recognition of market trends
 Better market positioning
 Improved customer service levels
Cost:
The level of profitability of an organization can be determined by
analyzing its costs and revenue. Cost analysis involves the study of
total costs incurred by an organization to acquire various resources,
such as labor, raw materials, machines, land, and technology.

ELEMENTS OF
COST
The elements that constitute the cost of manufacture are known as the
elements of cost. Such element of cost is divided into three categories.
In a manufacturing concern, raw materials are converted into a finished
product with the help of labour and other service units. They are
Material, Labour and Expenses.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 48
The cost of a product consists of the
following cost components or elements:
 Direct Material
 Direct Labour
 Direct Expenses
 Factory Overhead
 Selling and Distribution overhead
 Administrative overhead
All direct material, direct labour and direct expenses are added to
get prime cost. Likewise all indirect material, indirect labour and
indirect expenses are added to get overhead. Again, overhead is
divided into four categories. They are factory overhead,
administration overhead, selling overhead and distribution
overhead.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 49

 Materials:

Material indicates principal

substances used in production.
Examples are: cotton, jute, iron-
ore, and silicon.
The cost of material is further
divided in to direct and indirect
materials.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 50

Direct Material:

Direct materials refer to the cost of

materials which become a major part of the
finished product. They are raw materials
that become an integral part of the finished
product and are conveniently and
economically traceable to specific units of
output. Some examples of direct materials
are: raw cotton in textiles, crude oil to make
diesel, steel to make automobile bodies.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 51

Indirect material:

These are materials which are

used ancillary to manufacture
and cannot be traced in to the
finished product. These form a
part of manufacturing overhead.
Examples are glue, thread, nails,
consumable stores, printing and
stationary material

UNIT -1 IE&M Demand Forecasting & Elements of Cost 52

 LABOUR:

Labor is the physical or mental effort

expended on the production of an
item. It is the active factor of
production as against material which
is a passive factor. The cost of labor
further divided into direct and
indirect labor.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 53

 Direct Labour:

Direct labour is defined as the labour

associated with workers who are engaged
in the production process. It the labour
costs for specific work performed on a
product that is conveniently and
economically traceable to end products.
Direct labour is expended directly upon
the materials comprising the finished
product. Examples are the labour of
machine operators and assemblers.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 54

 Indirect labor:

This includes wages paid for all labour which

is not directly engaged in changing the
shape or composition of raw materials. It
cannot be traced directly to the product. Lick
indirect materials, indirect labour forms part
of the manufacturing overheads. Examples
of indirect labor cost are wages paid to
foremen, supervisors, store- keepers, time-
keepers, salaries of office executives and the
commission payable to sales
representatives.
UNIT -1 IE&M Demand Forecasting & Elements of Cost 55
 Direct Expenses:
Direct expenses include any expenditure other than
direct material and direct labor directly incurred on a
specific cost unit (product or job). Such special
necessary expenses can be identified with cost units
and are charged directly to the product as part of
the prime cost.
Some examples of direct expenses are:
(a)Cost of special layout, designing or drawings;
(b)Hire of tools or equipment for a particular
production or product;
(c)Maintenance costs of such equipments.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 56

 Indirect expenses:

Indirect expenses are those incurred

for the business as a whole rather
than for a particular order, job or
product. Examples of such expenses
are rent, lighting, insurance charges.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 57

 Overheads:

Overheads may be defined as the aggregate of indirect

material, indirect labor and indirect expenses. Thus, all
indirect costs are overheads. These cannot be associated
directly with specific products. Hence, the amount of
overhead has to be allocated and apportioned to products
and services on some reasonable basis. The synonymous
term is “burden”. Overheads may be subdivided in to
following groups:
a)Factory overheads.
b) Administrative overheads.
c) Selling and distribution overheads.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 58

 Factory Overhead:

It is otherwise called Production Overhead

or Works Overhead. It refers to the
expenses that are incurred in the
production place or within factory
premises. For example: Indirect material,
rent, rates and taxes of factory, canteen
expenses etc.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 59

 Selling, Distribution and Administrative
Overhead:

Selling Overhead: It refers to all expenses incurred in

connection with sales. For example: Salary of sales department
staff, travelers’ commission, advertisement etc.
Distribution Overhead: It refers to all expenses incurred in
connection with the delivery or distribution of
goods and services from the producer to the consumer. For
example: Delivery van expenses. loading and unloading,
customs duty, salary of deliverymen etc.
Administrative Overhead:
It is otherwise called Office Overhead. It refers to the expenses
that are incurred in connection with the general administration
of the company. For example: Salary of administrative staff,
postage, telegram and telephone, stationery etc.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 60

Activity#2
Image that you are going to launch a
new product in 2025 on forecasting
customers demand. Prepare the
approximate cost sheet to start a
industry to manufacture your product.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 61

Fixed cost:
Fixed cost is the cost which does not change
in total for a given time period despite wide
fluctuations in output or volume of activity.
Example: Rent, Property taxes, Supervising
salaries, depreciation on office facilities,
advertising, insurance etc..
Fixed cost can be further classified into three
types:
 Committed cost
 Managed cost
 Discretionary cost

UNIT -1 IE&M Demand Forecasting & Elements of Cost 62

 Variable cost:

Variable costs are those costs that vary

directly and proportionately with the
output. There is a constant ratio between
the change in the cost and change in
the level of output. Direct materials cost
and direct labor cost are the costs which
are generally variable costs.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 63

Mixed cost:

Mixed costs are made up of fixed

and variable elements. They are
combination of semi-variable
costs and fixed costs.

UNIT -1 IE&M Demand Forecasting & Elements of Cost 64

UNIT -1 IE&M Demand Forecasting & Elements of Cost 65