Strategic Role of Cost Estimation
Chapter 8: Cost Estimation
Strategic Role of Cost Estimation * Cost Estimationthe development of a well-defined relationship b/t a cost object and its cost drivers for the purpose of predicting the cost * Facilitates strategic mgmt is 2 ways * Helps predict future costs * Helps identify key cost drivers for a cost object and which driver is most useful * Using Cost Estimation to Predict future costs * Strategic mgmt requires accurate estimates for the following: * To facilitate strategy development and implementation * To facilitate value-chain analysis * To facilitate target costing and pricing * To facilitate effective performance measurement, evaluation, and compensation * Cost Estimation for Different Types of Cost Drivers * Activity-Based, Volume-Based, Structuralusually long-term impact, Executional * The effect on total cost of experience is nonlinearcosts decrease w/ increase manufacturing experience * Relationship between the structural cost driver, scale, and total cost is nonlinear * Scaleused to describe the manufacture of similar products that differ in size * Using Cost Estimation to Identify Cost Drivers * Most practical way is to rely on judgment of product designers, engineers, and manufacturing personnelmost knowledgeable
Six Steps of Cost Estimation * Step 1: Define the Cost Object to be estimated * Ex. Goal is to estimate product costs to improve pricing, relevant cost object are products manufactured in plant * Ex. Goal is to reward managers for reducing cost, cost object are individual manufacturing depts in plant since they mostly control costs * Step 2: Determine the Cost Drivers * Most important step * May be numerous relevant cost drivers * Step 3: Collect Consistent and Accurate Data * Data must be consistent and accurate *
Strategic Role of Cost Estimation * Cost Estimationthe development of a well-defined relationship b/t a cost object and its cost drivers for the purpose of predicting the cost * Facilitates strategic mgmt is 2 ways * Helps predict future costs * Helps identify key cost drivers for a cost object and which driver is most useful * Using Cost Estimation to Predict future costs * Strategic mgmt requires accurate estimates for the following: * To facilitate strategy development and implementation * To facilitate value-chain analysis * To facilitate target costing and pricing * To facilitate effective performance measurement, evaluation, and compensation * Cost Estimation for Different Types of Cost Drivers * Activity-Based, Volume-Based, Structuralusually long-term impact, Executional * The effect on total cost of experience is nonlinearcosts decrease w/ increase manufacturing experience * Relationship between the structural cost driver, scale, and total cost is nonlinear * Scaleused to describe the manufacture of similar products that differ in size * Using Cost Estimation to Identify Cost Drivers * Most practical way is to rely on judgment of product designers, engineers, and manufacturing personnelmost knowledgeable
Six Steps of Cost Estimation * Step 1: Define the Cost Object to be estimated * Ex. Goal is to estimate product costs to improve pricing, relevant cost object are products manufactured in plant * Ex. Goal is to reward managers for reducing cost, cost object are individual manufacturing depts in plant since they mostly control costs * Step 2: Determine the Cost Drivers * Most important step * May be numerous relevant cost drivers * Step 3: Collect Consistent and Accurate Data * Data must be consistent and accurate *