ECON 2

• Cost Estimating is used to forecast the present and future cost consequences of engineering designs
• Cost Estimating is used for:

  • Providing information for setting a selling price for quoting, bidding, or evaluating contracts
  • Determining if a proposed product can be made and distributed at a profit
  • Evaluating how much capital can be justified for process changes or other improvements
  • Establishing benchmarks for productivity improvement programs
• Top-Down Approach:

  • Uses historical data from similar engineering projects
  • Modifies original data for changes in inflation/deflation, activity level, weight, energy consumption, size, etc.
  • Best use is early in estimating process

  Bottom-Up Approach:

  • More detailed cost-estimating method
  • Attempts to break down the project into small, manageable units and estimate costs
  • Works best when detail concerning desired output is defined and clarified
• Fixed Costs:

  • Unaffected by changes in activity level over a feasible range of operations
  • Examples include insurance, taxes on facilities, general management salaries, license fees, and interest costs on borrowed capital
• Variable Costs:

  • Associated with an operation that varies in total with the quantity of output or other measures of activity level
  • Examples include costs of material and labor used in a product or service
• Incremental Costs:

  • Additional cost (or revenue) that results from increasing the output of a system by one or more units
  • Example: Incremental cost per mile for driving an automobile
• Direct Costs:

  • Costs that can be reasonably measured and allocated to a specific output
  • Examples include labor and material costs directly associated with a product, service, or construction activity
• Indirect Costs:

  • Costs allocated through a selected formula to the outputs or work activities
  • Examples include costs of common tools, general supplies, and equipment maintenance in a plant
• Standard Costs:

  • Planned costs per unit of output established in advance of actual production or service delivery
  • Developed from anticipated direct labor hours, materials, and overhead categories
• Cash Cost versus Book Cost:

  • Cash cost involves payment in cash and results in cash flow
  • Book cost or noncash cost is a payment that does not involve a cash transaction, such as depreciation
• Sunk Cost:

  • A cost that has occurred in the past and has no relevance to estimates of future costs and revenues

  Opportunity Cost:

  • The cost of the best rejected opportunity and is hidden or implied
• Life-Cycle Cost:

  • The summation of all costs related to a product, structure, system, or service during its life span
  • Begins with the identification of the economic need and ends with retirement and disposal activities
• Elements of Cost:

  • Material: the substance from which the product is made
  • Labor: human resource for the conversion of raw material into finished goods
  • Expenses: all costs incurred in the production of finished goods other than material
• Overheads:

  • Include the cost of indirect material, indirect labor, and indirect expenses
  • Overhead = Indirect material + Indirect labor + Indirect expenses
  • Examples include factory/works production overheads, office and administrative overheads, and selling and distribution overheads
• Factory/Works Overheads:

  • Include all indirect costs incurred in the factory for the production of goods
  • Examples include indirect materials, indirect wages, and indirect expenses incurred in the factory
• Office and Administrative Overheads:

  • Incurred for the direction and control of an undertaking
  • Examples include office printing and stationery, salaries of office managers, rent, insurance, rates, and taxes of office buildings
• Selling and Distribution Overheads:

  • Selling overheads are indirect costs incurred in relation to the procurement of sale orders
  • Distribution overheads are indirect costs incurred in relation to the execution of the sales order
• Direct Material:

  • Examples include silver for making jewelry, sugarcane for making sugar, etc.

  Indirect Material:

  • Examples include oil, waste, printing, and stationery
• Direct Labor:

  • Examples include wages paid to carpenters for making furniture, cost of a tailor in producing readymade garments, etc.

  Indirect Labor:

  • Examples include salaries of storekeepers, works managers, and supervisors
• Direct Expenses:

  • Examples include hire of special machinery, cost of special designs, surveyors, and other consultants

  Indirect Expenses:

  • Examples include rent, rates and taxes of buildings, repair, insurance, and depreciation on fixed assets
• Indirect Material for Selling and Distribution Overheads:

  • Examples include cost of packing material, oil, grease, spare parts, etc.

  Indirect Wages for Selling and Distribution Overheads:

  • Examples include salaries of godown employees, wages of drivers, and packers
• Indirect Expenses for Selling and Distribution Overheads:

  • Examples include packing expenses, godown rent, insurance, depreciation, repair, freight carriage outwards, and other transport charges
• COST

  The amount of expenses (actual or notional) incurred on or attributable to specified thing or activity