TAILIEUCHUNG - Lecture Cost management: A strategic emphasis - Chapter 8: Cost estimation

After studying this chapter, you will know: Understand the strategic role of cost estimation, understand the six steps of cost estimation, apply and understand each of cost estimation methods: the high-low method and regression analysis, explain the implementation issues of the cost estimation methods. | Cost Estimation Chapter Eight 8-2 Understand the strategic role of cost estimation Understand the six steps of cost estimation Apply and understand each of cost estimation methods: the high-low method and regression analysis Explain the implementation issues of the cost estimation methods Learning Objectives 8-3 Learning Objectives (continued) Use learning curves to estimate a certain class of non-linear cost function 8-4 Cost estimation is the development of the functional relationship between a cost object and its cost drivers for the purpose of predicting the cost Accurate cost estimates facilitate the strategic cost-management process in two ways: Cost estimates based on activity-based, volume-based, structural, and executional cost drivers facilitate effective planning, decision making, and performance measurement Strategic Role of Cost Estimation 8-5 Steps in Cost Estimation There are six steps in the cost estimation process: Define the cost object to be estimated Determine the cost driver(s) The most important step: specification of underlying causal factors of a cost Collect consistent and accurate data Consistent means that the data are calculated on the same accounting basis and all transactions are recorded in the proper period Accuracy refers to the reliability of the data 8-6 Steps in Cost Estimation (continued) Graph the data To identify unusual patterns, possible nonlinearities, and any outlier observations Select and employ a cost-estimation method (., linear regression) Assess the accuracy of the cost estimate One measure of the accuracy of the estimation method is the mean absolute percentage error (MAPE) produced by that method 8-7 There are two cost estimation methods discussed in this chapter: The High-Low method Regression analysis (both linear and nonlinear models) The High-Low method is simpler but less accurate than the regression method. The method chosen by the cost analyst will depend on the level of accuracy desired and any .

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