Cost estimates are not expected to be exact, but they should be accurate enough to support a thorough economic analysis using an engineering economy approach. There are bottom-up and top-down approaches; each treats price and cost estimates differently. Costs can be updated via a cost index, which is a ratio of costs for the same item at two separate times. The Consumer Price Index (CPI) is an often-quoted example of cost indexing. Cost estimating may also be accomplished with a variety of models called Cost-Estimating Relationships. Two of them are Cost-capacity equation. Good for estimating costs from design variables for equipment, materials, and construction.
Factor method. Good for estimating total plant cost.
Traditional cost allocation uses an indirect cost rate determined for a machine, department, product line, etc. Bases such as direct labor cost, direct material cost, and direct labor hours are used. With increased automation and information technology, different techniques of indirect cost allocation have been developed. The Activity-Based Costing method is an excellent technique to augment the traditional allocation method. The ABC method uses the rationale that cost drivers are activities—purchase orders, inspections, machine setups, reworks. These activities drive the costs accumulated in cost pools, which are commonly departments or functions, such as quality, purchasing, accounting, and maintenance. Improved understanding of how the company or plant actually accumulates indirect costs is a major by-product of implementing the ABC method. |
2002 McGraw-Hill Higher Education