University:
California State University, Northridge
Course:
MSE 604 | Engineering Economy and Financial Analysis
Academic year:

2024
Views:

245

Pages:

15
Author:

argreffirz4a

CHAPTER 7 Cost Estimation Part 2 The Unit Technique • Unit Method: – Popular, Very preliminary in nature, Multiply the number of units times a per unit cost factor. • Examples: – Cost per operating mile (autos, trucks, etc.), Cost of construction (per sq. foot), Cost per mile (highways, cable, etc.) The Factor Technique • An extension of the unit method • Originally developed for estimating total plant costs; • Identify the major equipment items, then multiply by certain factors; • Sum of products of component quantities and corresponding unit costs plus component costs estimated directly C = Σ dCd + Σ mfmUm C = cost being estimated Cd = cost of d estimated directly fm = cost per unit of m Um = number of units of m Example • Estimate the cost of a house consisting of 2,000 sq, two porches, and a garage. Using unit factor of $50 per sq, and $5,000 per porch and $8,000 per garage. C = Σ dCd + Σ mfmUm • C=($5,000*2)+8000+($50*2000)=$118,000 Cost Estimating Relationships ( CER ) • CER’s use design variables to predict costs. • CER’s are more quantitative in nature than cost indexes. • Developed from statistical approaches; – Usually linear or non-linear regression models. • A common model: Cost-Capacity Model • A model that relates the cost of an asset or activity to its capacity • Called also power-sizing The Power-Sizing Technique • Also referred to as exponential model • Used for costing plants and equipment • Recognizes that cost varies as some power of the change in capacity or size • Example • (CA / CB) = (SA / SB)X • CA = CB(SA / SB)X CA = Cost of plant A CB = Cost of plant B SB = Size of plant B SA = Size of plant A X = cost-capacity factor (reflects economies of scale) The Exponent in the CCE - x • • • • Normally 0 1, a larger size is expected to be more costly than a linear model. • If x is unknown, common to assume x = 0.6 • The Chemical Engineering area has well documented CCE parameters. • Other sources: – – – – Plant Design and Economics for Chemical Engineers; Chemical Engineers Handbook; EPA publications; Equipment companies. The Learning and Experience Technique • Learning curve is a mathematical model that explains increased worker efficiency and improved performance from repetitive production • Most learning curves are based on the assumption that the number of input resources needed decreases by a constant percentage each time the number of units produced doubles. Zu = Kun u = the output unit number Zu = # resource units to produce output unit u K = # resource units to produce 1st output unit s = learning-curve slope parameter (decimal) n = log s / log 2 Example • It has been determined that a 90% learning curve applies to a particular assembly operation. It takes 30 minutes to assemble the first unit. How many minutes are required to produce the 5th unit? the 30th unit? • n = log (0.9) / log (2) = -0.152 • Z 5 = 30(5) -0.152 = 23.49 minutes • Z 30 = 30(30) -0.152 = 17.89 minutes Other Computations • • • • Tu = cumulative time to produce u units = K[∑un] Cu = cumulative average for u units = Tu/u Continuing our example, T5 = 30[1 -0.152 + 2 -0.152 + 3 -0.152 + 4 -0.152 + 5 -0.152 ] = 130.18 minutes • C5 = T5/5 = 130.18/5 = 26.04 minutes per unit Another Example • A construction Company designs and builds residential family homes. The company is ready to construct, in sequence, 16 new homes of 2400 square feet each. The same basic design, with minor changes, will be used for each home. The successful bid for the construction materials in the first home is $64,800, or $27/square foot. The manger believes, based on past experience, that several actions can be taken to reduce material cost by 8% each time the number of homes constructed doubled. Based on this information, (a) what is the estimated cumulative average material cost per square foot for the first homes, and (b) what is the estimated material cost per square foot for the last 16th home? Manufacturing Cost Estimating • Objective: – To make a product that can be sold at a competitive price yet yields a reasonable profit. • Determining Selling Price – To estimate the cost of a manufactured product, you need a product design and process plan to compute direct labor hours and material costs • A cost estimating worksheet or spreadsheet (e.g., Figure 8-5) is a useful tool for this. Cost Accounting Overview • Costs incurred within a system are tracked by the cost accounting system • Cost accounting system accumulates: – Material costs, Labor costs, and Indirect costs (overhead or factory expense) • And allocates these cost to defined cost centers. • A difficult problem, when required, is to properly allocate the IDC’s to the various cost centers, departments, processes, and product lines. • Cost centers do utilize a portion of the total indirect costs • Thus, some allocation scheme needs to be applied to the cost centers Traditional IDC Allocations Cost Category Allocation Basis Taxes Space occupied Heat, AC, light Space, usage, outlets Power Space, direct labor hrs Receiving/Purchasing $$ of Mtls; No. orders Personnel, Machine shop Direct labor hours or DL cost. Building Maintenance Space occupied Software/Networks Number of accesses Quality Control No. of inspections Summary • Cost estimation is not an exact science • Estimates should be accurate enough to support robust engineering economy cost analysis • Two Approaches: (Treat costs differently) – Bottom-Up and Top-Down • Cost Indexes are used to estimate and update costs • Cost Estimating – Cost-Capacity Equations, • Cost estimation from design variables for material, equipment, and construction. – Factor Method • Used to estimate total plant costs.

Cost Estimation, Part 2

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