Which cost estimation method do you think is the most accurate? Why?© BrainMass Inc. brainmass.com October 16, 2018, 5:44 pm ad1c9bdddf
Which cost estimation method do you think is the most accurate? Why?
The accurateness of cost estimation process can make or break project success. We should know the strategies that will help us gain control of this key area and ensure future project profitability!
Cost estimation models are mathematical algorithms or parametric equations used to estimate the costs of a product or project.
The evidence on differences in estimation accuracy of different estimation approaches and models suggest that there is no "best approach" and that the relative accuracy of one approach or model in comparison to another depends strongly on the context. This implies that different organizations benefit from different estimation approaches.
One of the greatest challenges for any company is to successfully deliver on all aspects of a project both according to the client's specifications and within the allotted budget. It is often the case that either one aspect or the other can be accomplished, but not necessarily both. When it comes to controlling costs, it is a critical first step to make appropriate estimations at the outset of a project.
Most organizations use multiple methods for estimating projects. My preferred ones are parametric cost models and analogy. In the case of analogy, it is beneficial to consider the similarities between a previous system and the new system being estimated. This also provides an opportunity to explore the feasibility ...
The solution examines what cost estimation method is most accurate.
Applied Accounting for Decision-Making
JTI is in the process of measuring its manufacturing costs and has assigned you to the measure of the manufacturing maintenance activity of JTI's small travel items, including travel clocks. This production is done in a large plant in the eastern United States.
Maintenance is a significant mixed cost. Activity analysis indicates that maintenance activity consists primarily of maintenance labor setting up machines using certain supplies. A setup consists of preparing the necessary machines for a particular production run of a product. During setup, machines must still be running, which consumes energy. Thus, the costs associated with maintenance include labor, supplies, and energy. Unfortunately, JTI's cost accounting system does not trace these costs to maintenance activity separately.
JTI employs two full-time maintenance mechanics to perform maintenance. The annual salary of a maintenance mechanic is $30,000 and is considered a fixed cost. Two plausible cost drivers have been suggested: units produced and number of setups.
Data had been collected for the past 12 months and a plot made for the cost driver - units of production. The maintenance cost figures collected include estimates for labor, supplies, and energy. You recently attended an activity-based costing seminar where you learned that some types of activities are performed each time a batch of goods is processed rather than each time a unit is produced. Based on this concept, you have gathered data on the number of setups performed over the past 12 months. The plots of monthly maintenance costs vs. the two potential cost drivers follow.
1. Find monthly fixed maintenance cost and the variable maintenance cost per driver unit using the visual-fit method based on each potential cost driver. Explain how you treated the April data.
2. Find monthly fixed maintenance cost of the variable maintenance cost per
driver unit using the high-low method based on each potential cost driver.
3. Which cost driver best meets the criteria for choosing cost functions? Explain.