Cost challenges for chemical engineers

y y y y y y y y How much do we need to build a new chemical manufacturing plant? Estimation of capital investments How much does it cost to operate a chemical plant? Estimation of total product costs How can we estimate the economic value of making modifications to an existing plant? How can we select a best process from competing alternatives? Estimation of process profitability

Why to study Engineering Economics Chemical engineering is the branch of engineering that deals with the application of physical science (e.g., chemistry and physics), and life sciences (e.g., biology, microbiology and biochemistry) with mathematics and economics, to the process of converting raw materials or chemicals into more useful or valuable forms. Objectives of Engineering Economics Engineering economics is the application of economic techniques to the evolution of design and engineering alternatives. The role of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint. It continues with economic practices and techniques used to evaluate and optimize decisions on selection of different strategies. It is based on the principles of benefit-cost analysis. What Does Accounting Mean? To provide a record such as funds paid or received for a person or business. Accounting summarizes and submits this information in reports and statements. The reports are intended both for the firm itself and for outside parties. What Does Debit Mean? An accounting entry which results in either an increase in assets or a decrease in liabilities on a company's balance sheet or in your bank account. What Does Asset Mean? 1. A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

2. Assets are bought to increase the value of a firm or benefit the firm's operations. You can think of an asset as something that can generate cash flow, regardless of whether it's a company's manufacturing equipment or an individual's rental apartment. In the context of accounting, assets are either 1. current 2. fixed (non-current)

Current means that the asset will be consumed within one year. Generally, this includes things like cash, accounts receivable and inventory. Fixed assets are those that are expected to keep providing benefit for more than one year, such as equipment, buildings and real estate. Tangible Assets: Tangible assets are those that maintain a physical existence or form. They can be seen and touched and occupy space. Equipment, land and automobiles are examples of tangible assets. Intangible Assets: Intangible assets have no physical form but exist in contracts or rights. Patents, copyrights and goodwill are examples of intangible assets. Liquid Assets: "Liquid" in this regards relates to the proximity of an asset to cash. Cash is therefore the most liquid of assets and all other assets are liquid to some degree, depending on their proximity to cash. Assets that can be easily and quickly be converted to cash are referred to on the balance sheet as current assets. Conversion is usually possible and expected within a 12-month period. Assets that are unlikely to be converted within a 12-month period are referred to as fixed assets and are considered illiquid assets. What Does Credit Mean? A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company. 2. An accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet. On the company's income statement, a debit will reduce net income, while a credit will increase net income. The amount of money available to be borrowed by an individual or a company is referred to as credit because it must be paid back to the lender at some point in the future. For example, when you make a purchase at your local mall with your VISA card it is considered a form of credit because you are buying goods with the understanding that you'll need to pay for them later.

For example, on a company's balance sheet, a debit will increase the inventory account (an asset) if the company buys merchandise for resale on credit. On the other hand, a credit will increase the company's accounts payable (a liability). What Does Liability Mean?  A company's legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. Liability Accounts Anything that is owed to others is a liability. Liabilities are often referred to as "payables".Liabilities are generally separated into two groups: Current Liabilities Debts to others that are due in a short period of time and are paid with current assets. Long-term Liabilities Debts that are "fixed" or paid over a long period of time, often for plant assets. Common Liability Accounts: Current Liabilities:   Notes Payable - Promissory notes to creditors. Accounts Payable - What you owe others on account.

 Unearned Revenue - You've been paid, but haven't delivered.  Salaries Payable - Salaries you owe employees.   Interest Payable - Interest you owe. Taxes Payable - Taxes you owe.

Difference between Notes Payable and Accounts Payable  While both of these are liabilities, Notes Payable involves a written promissory note. For example, if your company wishes to borrow $100,000 from its bank, the bank will require company officers to sign a formal loan agreement before the bank provides the money. (The bank might also require your company to pledge collateral and for the company owners to personally guarantee the loan.) Perhaps the loan paperwork will be a half inch high. Your company will record this loan in its general ledger account, Notes Payable. (The bank will record the loan in its general ledger account Notes Receivable.)

 Contrast the bank loan with phoning one of your company s suppliers and asking for a delivery of products or supplies. On the next day the products arrive and you sign the delivery receipt. A few days later your company receives an invoice from the supplier and it states that the payment for the products is due in 30 days. This transaction did not involve a promissory note. As a result, this transaction is recorded in your company s general ledger account Accounts Payable. The supplier will record the transaction with a debit to its asset account Accounts Receivable (and a credit to its account Sales). Long-Term Liabilities:  Liabilities that are carried over a number of years or at least more than one accounting cycle. Examples of long-term liabilities are mortgages payable, bonds payable, and long-term notes. Equity  In day-to-day parlance, you may be familiar with the word "equity" if you're a homeowner. Homeowners who make regular mortgage payments will accumulate equity value in their property, and will be able to borrow against that equity.  Equity is the owner's value in an asset or group of assets.  In accounting, equity is usually defined as the value of the assets contributed by the owners.  As an example, a company with total assets valued at $1,000, may have debt (liabilities) valued at $900, in which case the owner's value in the assets is $100, representing the company's equity.  Businesses need to be financed, and although this financing is not necessarily required to come from the owners, most companies will have a portion of its financing fund coming from those owning the business. This funding that is supplied to the company by the owners is called "equity".  Equity is also provided when the company generates profit and retains that profit in the business. This is reflected on the balance sheet as Retained Earnings. By the same token, a company generating losses will reduce its equity by the value of the loss.  Just so you know, some writers do describe liability as the equity of creditors, a description that doesn't sit well with many, as it seems to transform the true meaning of the word "equity". The description is correct if equity is taken to mean, "rights to property", which is what the creditors have. Generally speaking, equity speaks to the property rights held by the owners of a business in the business they own.  Equity (also referred to as Capital, Shareholder's equity, Net Worth) can be mathematically stated as the difference between Total Assets and Total Liabilities. This difference is also known as Net Assets. Positive equity therefore implies that the sum of the company's assets is greater

than the sum of its liabilities, while negative equity implies that the sum of its assets is less than the sum of its liabilities, in which case the business is completely "owned" by the creditors. Not a pleasant situation for any company to be in!  The Shareholders' Equity section of the balance sheet can be very crowded. A balance sheet with a shareholders' equity section will probably only show the following:  Preferred Stock  Common Stock  Retained Earnings  A more complex balance sheet will show a more crowded section on shareholders' equity.  Retained Earnings  Preferred Stock  Common stock  Additional Paid-In Capital  Retained earnings  Treasury stock  Preferred stock Preferred stock  Preferred stock is usually defined as a hybrid between debt and equity. It's a hybrid because it maintains the dividend-paying characteristic of common stock, as well as the fixed interest payment of debt. Unlike common stockholders, preferred stockholders are usually not given voting rights. Common stock Common Stock has no predetermined dividend payout rate or time, but the holders maintain the rights to vote and the right to share in the residual value of the company upon liquidation.  Additional Paid-In Capital  Additional Paid-In Capital represents the excess paid for the company's stock above the par value.  Treasury stock

 Treasury stock, which is always a negative value, represents the company's purchase of its own stock.  Improve  EQUITY:- Equity is the term in which liability is introduced  Owner Equity :- Owner Equity is the term in which liability and owner capital is introduce...it is some time called Equities....

Owner equity is a residual value of assets which the owner has claim to after satisfying other claims on the assets (liabilities). Owner equity is, therefore, a basic measure of the financial strength of a business. Traditionally, owner equity is divided into Contributed Capital and Retained Earnings. Contributed capital represents investments by the owner(s), or by stockholders if the business is a corporation. Retained earnings are an accumulation of net earnings which have not been withdrawn or distributed and provide a strong historical representation of the ability of the business to earn profits. Thus, retained earnings for a business give an indication of the success of management.  The following is the Equity equation: Assets = Liabilities + Owner s Equity Owner s Equity = Assets + Liabilities Capitalize This is the accounting process to classify a cost as a fixed asset, as opposed to charging it as an expense.  Capitalizing cost has zero effect on the income statement (except in the form of depreciation). Capital:  Long-term liabilities (debt) and shareholder s equity combine to form the capital of the company. Most companies are financed by both debt and equity and determining the cost of capital involves the calculation of the cost of both debt and equity. Capital:  A company will constantly thrive to maintain the ideal mix of common stock, preferred stock and debt.  Leverage (the use of debt & other fixed charge securities in the capital structure) is a common theme in any discussion on capital structure management. Preferred Stock:

 Preferred stock is a unique brand of stock that gives the holders a fixed return on their investment.  Recorded on the balance sheet (right side), liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, the outstanding money that a company owes to its suppliers would be considered a liability.  One form of liability, for example, would be the property taxes that a homeowner owes to the municipal government.  Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period. Balance sheet It's called a balance sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity).  Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses. What Does Balance Sheet Mean? A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.The balance sheet must follow the following formula: Assets = Liabilities + Owner s Equity Definitions  Balance Sheet A snapshot of the business s Assets, Liabilities and Net Worth; a report of the company s financial position at a particular moment in time Assets Business property; what the business owns Liabilities What the business owes Net Worth The difference between assets and liabilities

 Balance Sheet, cont. A financial statement that shows the financial position of a business as of a fixed date usually at the close of an accounting period.  Budget A set of financial projections for cash inflow and outflow and other balance sheet items  Capital Expenditure A purchase of an item of property, plant, or equipment that has a useful life more than one year (fixed assets) and in , a purchase price of $2500 of more.  Credit In double-entry accounting, a increase in liabilities or income, or an decrease in assets (possessions) or expenses. An amount entered on the right side of an account in double-entry accounting. A decrease in the asset and expense accounts. An increase in the liability, capital and income accounts.

 Current Assets Cash, plus any assets that will be converted into cash within one year, plus any assets that you plan to use up within one year  Current Liabilities debts that must be paid within one year  Direct Expense Those expenses that relate directly to your product or service  Double-entry Accounting Logs each transaction as both a debit and as a credit; can be used with both cash and accrual methods. This is based on the premise that every transaction has two sides at least one account must be debited and one account must be credited and the debit and credit totals must be equal.  Expenses The costs acquired through the sale or delivery of goods or services FIFO (First-In, First-Out)  FIFO (First-In, First-Out) Tracks general quantities of inventory and calculates cost as if the oldest items in the inventory were sold first, so the existing inventory s value is based upon the most recent purchases  Fiscal Year Any 12-month accounting period used by a business  Fixed Asset Items purchased for use in a business which are depreciable over a fixed period of time determined by the expected useful life of the purchase. Usually includes real property, vehicles and equipment not intended for resale. (Land is NOT depreciable, but is still listed as a fixed asset.)  Fixed Asset Log A record used to keep track of fixed assets purchased by a business during the financial year to be used to determine depreciation expense to be taken for tax purposes

 Fixed Costs Costs that do not vary in total during a period even though the volume of goods manufactured may be higher or lower than anticipated  General Journal Used to record, in chronological order, all transactions of a business. These are then posted to the General Ledger.  General Ledger In double entry accounting, the master reference file for the accounting system. A permanent, classified record is kept for each business account. Each account is maintained on a separate page of the ledger. (Book, binder, of AIM system )  Gross Profit On Sales The difference between net sales and the cost of goods sold.  Gross Profit Margin % An indicator of the percentage of each sales dollar remaining after a business has paid for its goods. Calculated by dividing the gross profit by sales.  Income Statement A report presenting the profit and loss of a business, based on earnings less expenses for a period of time; usually one month  Indirect Expense Operating expenses that are not directly related to the sale of your product or service  Interest The price charged or paid for the use of money or credit  Inventory The stock of goods on hand for sale  Invoice A bill for the sale of goods or services sent by the seller to the purchaser  Ledger In double entry accounting, a permanent reference file for all accounts  LIFO (Last-In, First Out) Calculates cost of inventory as if you sold your most recent inventory first. It provides a higher reported cost and lower net income whenever your sales prices rise  Liabilities Amounts owed by a business to its creditors. The debts of the business.  Liquidity The ability of a company to meet its financial obligations. A liquidity analysis focuses on the balance sheet relationships for current assets and current liabilities  Long-Term Liabilities Liabilities that will not be due for more than a year in the future  Net Profit Margin % The measure of a business s success with respect to earnings on sales. It is derived by dividing net profit by sales. A higher margin means the firm is more profitable.  Operating Expense Normal expenses incurred in the running of a business  Operating Profit Margin % The ratio representing the pure operations profits, ignoring interest and taxes. It is derived by dividing the income from operations by the sales. The higher the percentage of operating profit margin, the better.

 Other Expenses Expenses that are not directly connected with the operation of the business. The most common is interest expense.  Other Income Income that is earned from non-operating sources. The most common is interest income.  Petty Cash Fund A cash fund from which non-check expenditures are reimbursed.  Physical Inventory The process of counting inventory on hand at the end of an accounting period. The number of units of each item is multiplied by the cost per item resulting in inventory value.  Posting The process of transferring data from the journal to the ledger  Prepaid Expense Expense items that are paid for prior to their use. E.g., insurance, rent, prepaid inventory, etc.) Principal The amount shown on the face of a note or bond. Unpaid principal is the portion of the face amount remaining at any given time.  Profit and Loss Statement See Income Statement  Quarterly Budget Analysis A method used to measure actual income and expenditures against projections for the current quarter of the fiscal year and for the total quarters completed. The difference is usually expressed as the amount and percentage over or under budget variance!  Quick Ratio A test of liquidity subtracting inventory form current assets and dividing the results by current liabilities. A quick ratio of 1.0 or greater is usually recommended.  Property, Plant and Equipment Assets such as land, buildings, vehicles and equipment that will be used for a number of years in the operations of the business and (with the exception of land) are subject to depreciation  Ratios: (using information from the financial statement and balance sheet) Total liabilities divided by net worth is the debt to net worth ratio; a ratio over one is too high (net worth = assets liabilities) Net profit/loss divided by net worth is the return-on-investment ratio; a ratio of at least 12 indicates a healthy business (net profit/loss = revenues expenses)  Real Property Land, land improvements, buildings and other structures attached to the land  Reconciling The process used to bring the bank s (or other s) records, the accounts, and the business s checkbook into agreement at the end of the banking period

 Retained Earnings Earnings of a corporation that are kept in the business and not paid out in dividends. This amount represents the accumulated, undistributed profits of the corporation.  Return-On-Investment (ROI) The rate of profit an investment will earn. The ROI is equal to the annual net income divided by total assets. The higher the ROI, the better.  Revenue The income that results from the sale of products, services, or property or earned from investments  Revenue and Expense Journal In single-entry accounting, the record used to keep track of all checks written by the business and all income received for the sale of goods or services  Single-Entry Accounting Small-business recordkeeping system that tracks only income and expense accounts; not used with accrual accounting  Straight-Line Depreciation A method of depreciating assets by allocating an equal amount of depreciation for each year of its useful life  Sum-of-the-Years An accelerated method of depreciation in which a fractional part of the depreciable cost of an asset is charged to expense each year. The denominator of the fraction is the sum of the numbers representing the years of the asset s useful life. The numerator is the number of years remaining in the asset s useful life.  Tangible Personal Property Machinery, equipment, furniture and fixtures not attached to the land  Three-Year Income Projection A pro-forma (projected) income statement showing anticipated revenues and expenses for a business  Unearned Income Revenue that has been received, but not yet earned  Variable Costs Expenses that vary in relationship to the volume of activity of a business  Vertical Analysis A percentage analysis used to show the relationship of the components in a single financial statement. In vertical analysis of an income statement each item on the statement is expressed as a percentage of net sales  Wholesale Business A business that sells its products to other wholesalers, retailers or volume customer son discount  Work in Progress Manufactured products that are only partially competed at the end of the accounting cycle  Working Capital Current assets minus current liabilities. This is a basic measurement of a company s ability to pay its current obligations.