Hilton Maher Selto. 11 Cost Estimation McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc.,...

Hilton • Maher • Selto

11Cost Estimation

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

11-3

Concept of Cost Estimation

Relationship between activities and costs

Relationship between activities and costs

ActivitiesActivities

CostsCosts

3. This results in reduced . . .

1. Estimate . . .

We estimate costs to:

manage costsmake decisions

plan & set standards.

We estimate costs to:

manage costsmake decisions

plan & set standards.

2. Manage . . .

Exh.11-1

11-4

One Cost Driver and Fixed/Variable Cost Behavior

This model ignores other cost

behaviors and other cost drivers.

This model ignores other cost

behaviors and other cost drivers.

11-5

Intercept = Fixed Cost

Intercept = Fixed Cost

Slope = Cost Driver Rate

Slope = Cost Driver Rate

$.16

One Cost Driver and Fixed/Variable Cost Behavior

Exh.11-2

11-6

Multiple Cost Drivers and Complex Cost Behavior

In cases of complex cost behavior and

multiple cost drivers, the cost-benefit test

should be considered when developing a

cost estimation model.

In cases of complex cost behavior and

multiple cost drivers, the cost-benefit test

should be considered when developing a

cost estimation model.

11-7


Step Cost•A cost that increases in steps as the amount of the cost driver volume increases.

•Also called a “semifixed cost”

Step Cost•A cost that increases in steps as the amount of the cost driver volume increases.

•Also called a “semifixed cost”

Costs stay fixed over a small range of activity

called the “relevant range”. As activity

increases to the next “relevant range,” costs

step up to the next level.

Costs stay fixed over a small range of activity

called the “relevant range”. As activity

increases to the next “relevant range,” costs

step up to the next level.

11-8


Relevant Range

1 person can make 50 deliveries per day.

Anything more than 50 requires an additional

delivery person.

1 person can make 50 deliveries per day.

Anything more than 50 requires an additional

delivery person.

Exh.11-3

11-9

Semivariable Costs

A semivariable cost is one that has both

a fixed and a variable

component.

For example, a cellular phone plan that charges $40 for the first 60 minutes

and a per minute charge thereafter.

11-10

Nonlinear Costs

A nonlinear cost is one that has a

curved component.

For example, the cost of an item may

get increasingly cheaper as the

quantity purchased increases.

11-11

Learning Curve

A learning curve relates cost

behavior to the time it takes to learn a

job.

For example, the greater the

experience, the less labor hours are

required to complete the job.

A learning curve relates cost

behavior to the time it takes to learn a

job.

For example, the greater the

experience, the less labor hours are

required to complete the job.

11-12

Learning Curve

As evidenced by the learning curve,

the “learning phenomenon”

tends to disappear over time.

i.e. more learning occurs at the

beginning than at the end.

As evidenced by the learning curve,

the “learning phenomenon”

tends to disappear over time.

i.e. more learning occurs at the

beginning than at the end.

11-13

Cost Estimation MethodsRegression Analysis

A statistical method used to create an equation relating independent (or X)

variables to dependent (or Y) variables.

Past data is used to estimate relationships between costs and activities.

A statistical method used to create an equation relating independent (or X)

variables to dependent (or Y) variables.

Past data is used to estimate relationships between costs and activities.

Dependent variables are caused by the

independent variables.

Dependent variables are caused by the

independent variables.

Independent variables are the cost drivers that are correlated with the dependent variables.

Independent variables are the cost drivers that are correlated with the dependent variables.

11-14

Caution: Before doing the analysis, take time

to determine if a logical relationship

between the variables exists.

Caution: Before doing the analysis, take time

to determine if a logical relationship

between the variables exists.


The simple cost model is actually a regression model:

TC = F + VX

The simple cost model is actually a regression model:

TC = F + VX

This model will only be useful within a relevant range of

activity.

This model will only be useful within a relevant range of

activity.

11-15


A set of data can be regressed using several techniques:

•Manual computations•SPSS or SAS Statistical Software

•Excel or other spreadsheet

A set of data can be regressed using several techniques:

•Manual computations•SPSS or SAS Statistical Software

•Excel or other spreadsheet

The result of the regression process is a

regression model:

TC = F + VX

The result of the regression process is a

regression model:

TC = F + VX

Each regression model has an R-square (R2)

measure of how good the model is.

Range of R2 = 0 to 1.0

Each regression model has an R-square (R2)

measure of how good the model is.

Range of R2 = 0 to 1.0

11-16

Simple Regression AnalysisExample

CC Catering wants to know its average

fixed cost and variable cost per

unit.

Using the data to the right, let’s see

how to do a regression using

Excel.

CC Catering wants to know its average

fixed cost and variable cost per

unit.

Using the data to the right, let’s see

how to do a regression using

Excel.

11-17

Simple Regression AnalysisExample

You will need three pieces of information from your

regression analysis:

1. Estimated Variable Cost per Unit (line slope)

2. Estimated Fixed Costs (line intercept)

3. Goodness of fit, or R2

You will need three pieces of information from your

regression analysis:

1. Estimated Variable Cost per Unit (line slope)

2. Estimated Fixed Costs (line intercept)

3. Goodness of fit, or R2

To get these three pieces of information we will need to use THREE

different excel functions.

LINEST, INTERCEPT, & RSQ

To get these three pieces of information we will need to use THREE

different excel functions.

LINEST, INTERCEPT, & RSQ

11-18

Simple Regression Using Excel 2000

First, open the excel file

with your data and click on

“Insert” and “Function”

First, open the excel file

with your data and click on

“Insert” and “Function”

11-19


When the function box opens, click

on “Statistical”,

then on “LINEST”

When the function box opens, click

on “Statistical”,

then on “LINEST”

11-20


1. Enter the cell range for the cost amounts in the “Known_y’s” box.

2. Enter the cell range for the quantity amounts in the “Known_x’s” box.

1. Enter the cell range for the cost amounts in the “Known_y’s” box.

2. Enter the cell range for the quantity amounts in the “Known_x’s” box.

By clicking on the buttons to the left, you can highlight the desired cells

directly from the spreadsheet.

By clicking on the buttons to the left, you can highlight the desired cells

directly from the spreadsheet.

11-21


The Slope, or estimated variable cost per unit, is identified here. Click OK to put this value on your

spreadsheet.

The Slope, or estimated variable cost per unit, is identified here. Click OK to put this value on your

spreadsheet.

11-22


Repeat the procedure

using “Intercept”, to estimate fixed cost.

Repeat the procedure

using “Intercept”, to estimate fixed cost.

11-23


As previously, enter the

appropriate cell ranges in their

appropriate places.



appropriate places.

The estimated fixed cost per unit is identified here.

The estimated fixed cost per unit is identified here.

11-24


Finally, determine the “goodness of fit”, or R2, by

using the RSQ function.

Finally, determine the “goodness of fit”, or R2, by

using the RSQ function.

11-25




appropriate places.



appropriate places.

The estimated R2 for your estimated cost function is identified here.

The estimated R2 for your estimated cost function is identified here.

11-26

Want an example?Want an

example?

For example, demand for a product may be

affected by things such as inflation, interest rates, and

competitors’ prices.

For example, demand for a product may be

affected by things such as inflation, interest rates, and

competitors’ prices.

Cost Estimation MethodsMultiple Regression Analysis

Multiple Regression is a regression that has more than one independent (X) variable.

Can be very useful in situations where the dependent variable is impacted by several

different independent variables.

Can be very useful in situations where the dependent variable is impacted by several

different independent variables.

11-27

Cost Estimation MethodsAccount Analysis

A method that looks at past costs to estimate current cost-driver

rates.

Break costs into categories corresponding to each cost driver.

Sum total costs for each cost driver category.

Divide total cost for a given cost driver category by cost driver volume.

A method that looks at past costs to estimate current cost-driver

rates.

Break costs into categories corresponding to each cost driver.

Sum total costs for each cost driver category.

Divide total cost for a given cost driver category by cost driver volume.

More expensive than

regression, and requires more detailed breakdown of

costs.

11-28

Cost Estimation MethodsData Problems

Missing Data

Outliers

Mismatched Time Periods

Allocated Costs

Inflation

11-29

Cost Estimation MethodsEngineering Method

Not based on

past costs.

Not based on

past costs.

Cost estimates based on measurement and pricing of the work

involved in the activities that go into a product.

Cost estimates based on measurement and pricing of the work

involved in the activities that go into a product.

11-30

Choosing an Estimation MethodThings to Consider

Regression and account

analysis rely on past data.

Engineering relies on

present data.

Regression and account

analysis rely on past data.

Engineering relies on

present data.

Each method will likely

yield a different estimate.

Each method will likely

yield a different estimate.

Cost/Benefit must be

considered in choosing a

method.

Cost/Benefit must be

considered in choosing a

method.

11-31

Choice of Estimation Method

11-32

I wonder if I have

regressed TOO far?

End of Chapter 11

Hilton Maher Selto. 11 Cost Estimation McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc.,...

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Transcript of Hilton Maher Selto. 11 Cost Estimation McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc.,...