1. COST CONCEPTS AND DESIGN ECONOMICS INSPIRING CREATIVE
ANDINNOVATIVEMINDS
2. COST ESTIMATING USED TO
Provide information used in setting a selling price for
quoting, bidding, or evaluating contracts
Determine whether a proposed product can be made and
distributed at a profit (EG: price = cost + profit)
Evaluate how much capital can be justified for process changes
or other improvements
Establish benchmarks for productivity improvement programs
3. COST ESTIMATING
Used to describe the process by which the present and future
cost consequences of engineering designs are forecast
4. COST ESTIMATING APPROACHES
Top-down Approach
Bottom-up Approach
5. TOP-DOWN APPROACH
Uses historical data from similar engineering projects
Used to estimate costs, revenues, and other parameters for
current project
Modifies original data for changes in inflation / deflation,
activity level, weight, energy consumption, size, etc
Best use is early in estimating process
6. BOTTOM-UP APPROACH
More detailed cost-estimating method
Attempts to break down project into small, manageable units and
estimate costs, etc.
Smaller unit costs added together with other types of costs to
obtain overall cost estimate
Works best when detail concerning desired output defined and
clarified
7.
Fixed cost : unaffected by changes in activity level
Variable cost : vary in total with the quantity of output (or
similar measure of activity)
Incremental cost : additional cost resulting from increasing
output of a system by one (or more) units
Costs can be categorized in several different ways. 8.
Direct : can be measured and allocated to a specific work
activity
Indirect : difficult to attribute or allocate to a specific
output or work activity (alsooverheadorburden )
Standard cost : cost per unit of output, established in advance
of production or service delivery
9.
Opportunity cost : the monetary advantage foregone due to
limited resources.The cost of the best rejected opportunity.
Life-cycle cost : the summation of all costs related to a
product, structure, system, or service during its life span.
10.
Cash cost: a cost that involves a payment of cash.
Book cost: a cost that does not involve a cash transaction but
is reflected in the accounting system.
Sunk cost: a cost that has occurred in the past and has no
relevance to estimates of future costs and revenues related to an
alternative course of action.
11.
Investment Costor capital investment is the capital (money)
required for most activities of the acquisition phase;
Working Capitalrefers to the funds required for current assets
needed for start-up and subsequent support of operation
activities;
Operation and Maintenance Costincludes many of the recurring
annual expense items associated with the operation phase of the
life cycle;
Disposal Costincludes non-recurring costs of shutting down the
operation;
CAPITAL ANDINVESTMENT 12.
Overheadconsists of plant operating costs that are not direct
labor or material costs
indirect costs, overhead and burden are the same;
Prime Cost is a common method of allocating overhead costs
among products, services and activities in proportion the sum of
direct labor and materials cost ;
DIRECT, INDIRECT AND OVERHEAD COSTS 13. STANDARD COSTS
Representative costs per unit of output that are established in
advance of actual production and service delivery;
Standard Cost Element Sources of Data
Direct Labor Process routing sheets,+ standard times,
standardlabor rates;
Direct Material Material quantities per+ unit, standard
unitmaterials cost;
Factory Overhead Costs Total factory overheadcosts allocated
based onprime costs;
14. Figure 2-1 15. The Life Cycle Cost
The Life Cycle divided into 2 general time period
Acquisition Phase
Operation Phase
16. Acquisition Phase
Analysis of economic need
Conceptual design
Defined technocal and operational requirements
Development of feasible alternatives
Advance development and prototype-testing
17. Acquisition Phase
3. Detailed design
-activities to prepare, acquire and make ready for
operation
18. Operation Phase
Production, delivery or construction of the end item
Operation and customer use
Retirement from active operation or use
19. Fixed and Variable Cost
AFixed Cost (FC)is any cost that does not vary in proportion to
the quantity of output.
Examples include rent, depreciation, lighting,and supervisor
salaries.
Fixed Costs are commonly fixed only over a certain range of
production, called therelevant range .
For example supervisor salaries or lighting are fixed for one
shift operation but step to a new higher level for two shift
operation.
Successive relevant ranges are often represented graphically as
a step function.
20. Fixed and Variable Cost
AVariable Cost (VC)is a cost that varies in proportion to the
quantity of output.
Common examples include direct materials and direct labor.
Variable Costs are often represented as a linear function of
output
VC(q) = rate * q; where q is the level of production
Total Costis the sum of fixed costs and variable costs
TC(q) = FC + VC(q)
21. Total Costs
Adding the same amount of total fixed cost to every level of
total variable cost yields total cost.
For this reason, the total cost curve has the same shape as the
total variable cost curve; it is simply higher by an amount equal
toTC .
TC(q) = FC + VC(q)
22. Revenue
Price x Quantity
P x q
23. Breakeven
Total Revenue (TR)is the sum of revenues received for the units
sold.
Total Revenue is often represented as a linear function of
units sold.
TR(q) = price * q; where q is the number of units sold
If steady state inventory is assumed then units sold will be
equal to the units produced.
The point ofBreakeven , where total costs equal total revenues,
can be found by solving:
TR(q) = FC + VC(q)
24. Breakeven Graph Profit Loss 25. Significance of
Breakeven
If production (sales) is less than breakeven, a loss will
occur.
If production (sales) is greater than breakeven, a profit will
occur.
Lower values of the breakeven quantity are
generallydesirable.
Lower values can be achieved by:
increasing the revenue rate (the slope of the revenue
line),
decreasing the variable cost rate (the slope of the total cost
line),
reducing the fixed cost (the intercept of the total cost
line).
Engineering Economy projects frequently target one of these
areas for improvement
