engrcostsandestimates.ppt

8/9/2019 EngrCostsAndEstimates.ppt

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1

Engineering Economics Engineering Costs

and Cost Estimating

William Loendorf, P.E.


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Engineering Costs

Evaluating a set of feasible alternativesrequires that many costs be analyzed.

E am!les include costs for" initialinvestment, ne# construction, facilitymodification, general labor, !arts andmaterials, ins!ection and quality, training,material handling, fi tures and tooling,data management, technical su!!ort, as#ell as general su!!ort costs $overhead%.


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Engineering Costs

Classifications of costs &Fixed ' constant, unchanging (ent is constant $single, married, children% )y!ically includes building leases, insurance,

salaries, heating, and lighting costs. &Variable ' de!end on activity level

*ood de!ends on the number of occu!ants )y!ically vary #ith the level of !roduction.

&Marginal ' variable cost for the ne t unit +e!ends on the ne t unit $adult, child, baby%

&Average ' total cost number of units (ent- food- -n number of units


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Engineering Costs

*or e am!le, in a !roduction environment a fi edcost, such as costs for factory floor s!ace andequi!ment, remains the same even though the!roduction quantity, number of em!loyees, or

level of #or/'in'!rocess are varying. Labor costs are classified as a variable costbecause they de!end on the number ofem!loyees in the factory.

)hus fi ed costs are level or constant regardlessof out!ut or activity, and variable costs arechanging and related to the level of out!ut oractivity.


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*i ed, 0ariable and )otal Costs

E am!le 1

n entre!reneur named +2 #as considering the

money ma/ing !otential of chartering a bus tota/e !eo!le from his hometo#n to an event in alarger city.

+2 !lanned to !rovide trans!ortation, tic/ets tothe event, and refreshments on the bus for those#ho signed u!.

3e gathered data and categorized thesee !enses as either fi ed or variable"


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*i ed, 0ariable and )otal CostsE am!le 1


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Profit and Loss )erms

4n terms of costs and revenues there arethree !ossible !rofit and loss !oints for abusiness activity.

Breakeven " total revenue 5 total costs &6ust getting along

Profit region " total revenue 7 total costs &Putting money in the ban/

Loss region " total revenue 8 total costs &

9oing into debt


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Profit and Loss


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:rea/even ChartsE am!le ;

+2 develo!ed an overall total cost equation for hisbusiness e !enses.

- $=;?%$the number of !eo!le on the tri!% Let 5 number of !eo!le on the tri!

)hus,)otal Cost 5 ;;> - ;?

@sing this relationshi!, +2 can calculate the total cost forany number of !eo!le ' u! to the ca!acity of the bus.


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:rea/even Charts What he lac/s is a revenue equation to offset his costs.

+2As total revenue from this tri! can be e !ressed as")otal (evenue 55 $Charter tic/et !rice%$number of !eo!le on the tri!%5 $tic/et !rice%$ %

Profit or loss can no# be calculated as")otal Profit 5

5 B)otal (evenue ' B)otal Costs5 Btic/et !rice & B;;> - ;?4f he charged a charter tic/et !rice of =D>, then 5 BD> ' B;;> - ;?

5 1> ' ;;>


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:rea/even ChartsE am!le ;


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Past $ un/% Costs and*uture $F!!ortunity% Costs

Sunk cost ' money s!ent due to a !astdecision. We cannot do anything aboutthese costs. &Purchase !rice !aid for a car t#o years ago.

Opportunity cost ' a benefit that isforegone by engaging a resource in a

chosen activity instead of engaging thatsame resource in some other activity. Wema/e a choice or decision. &:uying lunch instead of gas.


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Which amount is the value at !resentGE am!le D

distributor of electric !um!s must decide #hatto do #ith a HlotH of old electric !um!s that #as!urchased D years ago.

oon after the distributor !urchased the lot,technology advances #ere made.

)hese advances made the old !um!s lessdesirable to customers.

)he !um!s are becoming more obsolescent asthey sit in inventory.

)he !ricing manager has the follo#inginformation.


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Which amount is the value at !resentGE am!le D

Price #hen !urchased I,???.??= Eun/ cost PEtorage costs 1,???.??= Eun/ cost PList !rice #hen !urchased J,>?= Fld list PaCurrent list !rice of ne# !um!s 1=


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E !ense )y!es

Recurring costs & /no#n, antici!atedand occurs at regular intervals. &Purchasing food, !aying rent.

on!recurring costs ' one'of'a'/indevent that occurs at an irregularinterval.

&Emergency maintenance e !enses.Sometimes we attempt to plan for large non-recurring costsby buying insurance. Paying the periodic insurance

premium turns this expense into a recurring cost.


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4ncremental Costs n incre"ental cost is the difference bet#een the

costs of t#o alternatives.E am!le

Choose bet#een alternative models and :. What

incremental costs occur #ith model :G

Cost Items A B

Purchase !rice 1?,???.??= 1I,>??.??= I,>??.??=4nstallation costs D,>??.??= >,???.??= 1,>??.??= nnual maintenance costs ;,>??.??= I>?.??= $1,I>?.??%= nnual utility e !enses 1,;??.??= ;,???.??= M??.??=

+is!osal costs after useful life I??.??= >??.??= $;??.??%=

Model

Costs

4ncremental


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Cash Costs vs. :oo/ Costs

#as$ costs ' movement of money fromone o#ner to another ' also /no#n as acash flo#. &Payment this month on an auto loan.

Book cost ' cost of a !ast transactionthat is recorded in an accounting boo/. &+o#n !ayment recorded in your chec/boo/

from last years automobile !urchase.


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Life'cycle Costs

Life!cycle ' all the time from the initialconce!tion of an idea to the death of a!roduct $!rocess%.

Life!cycle costs ' sum total of all thecosts incurred during the life cycle.

Life!cycle costing ' designing a!roduct #ith an understanding of all thecosts associated #ith a !roduct duringitNs life'cycle.


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Product Life'cycle


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Cumulative Life'cycle CostsCommitted and +ollars !ent


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Life'cycle +esign Change Costsand Ease of Change


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Cost Estimating

Economic analysis is future based. Costs and benefits in the future require

estimating.

Estimated costs are not /no#n #ithcertainty.

)he more accurate the estimate, the

more reliable the decision. Estimating is the foundation of

economic analysis.


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)y!es of Estimates

)here are three general ty!es ofestimates"%& Roug$ & order of magnitude, used for

high level !lanning, inaccurate, rangefrom 'D?O to - ?O of actual values.

'& Se"i!detailed ' based on historicalrecords, reasonably so!histicated andaccurate, '1>O to -;?O of actual values.

(& )etailed ' based on detaileds!ecifications and cost models, very

accurate, #ithin 'DO to ->O of actual.


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ccuracy vs. Cost )radeoff inEstimating


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Estimating Kodels

Microsoft Excel

Worksheet

Microsoft Excel

Worksheet

)rac/ing cost im!rovements.Learning Curve

Loo/ing at costs from several!ers!ectives.

)riangulation

caling !revious /no#n costs u!or do#n $economies of scale%.

Po#er izing

4nde number based on historicalchanges in cost.

Cost 4nde es

+ivide !roblem into items,

estimate each Q sum.

egmenting

@ses a R!er unitS factor.= sq ft, :enefits em!loyee

Per @nitE !lanationKodel

E am!les

US CPI
http://minneapolisfed.org/economy/calc/cpihome.htmlhttp://minneapolisfed.org/economy/calc/cpihome.html


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Estimating :enefits

o far #e have focused on cost terms and costestimating. 3o#ever, engineering economists must often

also estimate benefits.

E am!le benefits include sales of !roducts,revenues from bridge tolls and electric !o#ersales, cost reductions from reduced material orlabor costs, reduced time s!ent in traffic Tams,and reduced ris/ of flooding.

)hese benefits are the reasons that manyengineering !roTects are underta/en.

)he cost conce!ts and cost estimating modelscan also be a!!lied to economic benefits.


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Cash *lo# +iagrams

)he costs and benefits of engineering !roTects occurover time and are summarized on a Cash *lo# +iagram$C*+%.

!ecifically, a C*+ illustrates the size, sign, and timing ofindividual cash flo#s. 4n this #ay the C*+ is the basis for

engineering economic analysis. Cash *lo# +iagram is created by first dra#ing asegmented time'based horizontal line, divided intoa!!ro!riate time units.

)he time units on the C*+ can be years, months,

quarters or any other consistent time unit. )hen at each time #hen there is a cash flo#, a verticalarro# is added ' !ointing do#n for costs and u! forrevenues or benefits.

)hese cash flo#s are dra#n to relative scale.


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Cash *lo# +iagrams


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Cash *lo# +iagrams

ummarizes the flo# of money over time Can be re!resented using a s!readsheet

Uear Ca!ital costs FQK Fverhaul )otal? $M?,???.??%= $M?,???.??%=1 $1;,???.??%= $1;,???.??%=

; $1;,???.??%= $1;,???.??%=D $1;,???.??%= $;>,???.??%= $DI,???.??%=L $1;,???.??%= $1;,???.??%=> $1;,???.??%= $1;,???.??%=P 1?,???.??= $1;,???.??%= $;,???.??%=

#as$ flo*

=$1??,???.??%=$M?,???.??%=$P?,???.??%=$L?,???.??%=$;?,???.??%

='

=;?,???.??

? 1 ; D L > P

+e ar

# a s

$ f

lFverhaulFQKCa!ital costs


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ummary )his cha!ter introduced the cost conce!ts" fi ed and

variable, marginal and average, sun/, o!!ortunity,recurring and nonrecurring, incremental, cash andboo/, and life cycle.

*i ed costs are constant and unchanging asvolumes change, #hile variable costs change asout!ut changes.

*i ed and variable costs are used to find thebrea/even value bet#een costs and revenues, as#ell as the regions of net !rofit and loss.

marginal cost is for one more unit, #hile theaverage cost is the total cost divided by the number

of units

engrcostsandestimates.ppt

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