Suresh Rao
Cost Estimation
Objectives: Define cost estimation Describe the need for estimation of costs Discuss the cost estimation methods Explain regression analysis
Cost Estimation Cost estimation is the process of estimating the relationship between costs and the cost drivers that cause those costs. Costs versus Expenditures
• Many costs do not match the timing of their related expenditure of funds.
Consider the use of tyres on an automobile. Each mile driven consumers some of the tyre tread. Thus, the cost of the tyre occurs as the automobile is driven.
• However, the car owner does not pay for the tyre as it is being consumed but waits instead until the tyre has been substantially worn, then purchases a new tyre or a new set of tyres. Consequently, the expenditure, which occurs at the time of purchase, does not match the cost use pattern.
• This mismatch of costs and expenditures trouble analysts who perform cost estimation because at least some of the data from information systems are expenditure data, not necessarily cost data. At this stage of information technology, recoding cost data does not meet the cost-benefit test for most costs.
• For example, consider how difficult and time consuming it would be to record the cost of tyre consumption per mile. To present the concepts in this chapter, we simplify the real world by assuming that costs and expenditures match reasonably well. This simplification is widely practiced in business. Why Estimation of Costs? Organizations estimate costs primarily for three reasons: to manage costs, to make decisions, to plan and set standards.
Cost Management Companies must manage costs to be successful. Many companies have gone out of business because they did not manage costs. Many factories have shut down because managers did not manage costs effectively. Some countries and cities have faced bankruptcy because of poor cost management. Decision Making In deciding among alternative actions, managers must know
Objectives: Define cost estimation Describe the need for estimation of costs Discuss the cost estimation methods Explain regression analysis
Cost Estimation Cost estimation is the process of estimating the relationship between costs and the cost drivers that cause those costs. Costs versus Expenditures
• Many costs do not match the timing of their related expenditure of funds.
Consider the use of tyres on an automobile. Each mile driven consumers some of the tyre tread. Thus, the cost of the tyre occurs as the automobile is driven.
• However, the car owner does not pay for the tyre as it is being consumed but waits instead until the tyre has been substantially worn, then purchases a new tyre or a new set of tyres. Consequently, the expenditure, which occurs at the time of purchase, does not match the cost use pattern.
• This mismatch of costs and expenditures trouble analysts who perform cost estimation because at least some of the data from information systems are expenditure data, not necessarily cost data. At this stage of information technology, recoding cost data does not meet the cost-benefit test for most costs.
• For example, consider how difficult and time consuming it would be to record the cost of tyre consumption per mile. To present the concepts in this chapter, we simplify the real world by assuming that costs and expenditures match reasonably well. This simplification is widely practiced in business. Why Estimation of Costs? Organizations estimate costs primarily for three reasons: to manage costs, to make decisions, to plan and set standards.
Cost Management Companies must manage costs to be successful. Many companies have gone out of business because they did not manage costs. Many factories have shut down because managers did not manage costs effectively. Some countries and cities have faced bankruptcy because of poor cost management. Decision Making In deciding among alternative actions, managers must know