A Technical Report on

Estimating Models
From
[Economics for Engineers (HM-HU701)]
For Continuous Assessment 2(CA 2)

Under
MAULANA ABUL KALAM AZAD UNIVERSITY OF TECHNOLOGY
(Formerly known as West Bengal University of Technology)
Submitted by

NAME: SUBHRO MONDAL

REGISTRATION NUMBER: 212690100720038 OF 2021-22
ROLL NUMBER: 26900721037
DEPARTMENT: Mechanical Engineering
YEAR: 4th
SEMESTER: 7th

MODERN INSTITUTE OF ENGINEERING & TECHNOLOGY RAJHAT,

BANDEL, HOOGHLY
2024
ENGINEERING COSTS

•
Fixed Cost: These constant or unchanging regardless of the
level of output or activity.
•
Example: In production environment, costs for factory floor
space and equipment remains the same regardless of
production quantity, number of employee and level of work in
progress.
•
Variable Costs: These are not constant and depends in level of
out or activity.
•
Example: Labor costs are variable cost because it depend on
number of employees and number of hours they work.
•
Marginal Costs: It is the incremental cost for one more unit of
output.
•
Average Costs: It is total cost divided by number of units.
ENGINEERING COSTS
•
Sunk Cost: A sunk cost is money already spent as a result of
past decision.
•
e.g., (i) The cost of advertisement.
•
(ii). Price of two years old pc purchase at $2000 is sunk cost
which has no influence on current market value of $400 of pc.
•
Opportunity cost: An opportunity cost is associated with
using a resource in one activity instead of another.
•
Every time we use business resource in one activity we, we
give up the opportunity to use the same resource at that time in
some other activity.
•
“An opportunity cost is the benefit that is forgone by engaging
a business resource in a chosen activity instead of engaging
that same resource in the forgone activity”
ENGINEERING COSTS
•
Opportunity cost: Example
•
Suppose that a university student travel through the country
over the summer break with a tour agency. Then the…..
•
Cost analysis is: In considering the offer, student computes
the total cost of travel as Rs.30000 for 5 weeks and after
checking his bank account he agrees to go with the agency.
•
However, true cost to the student includes not only his out-
of pocket cash costs but also opportunity costs. By taking
the trip, the student is giving up the opportunity to earn
Rs.50000 as a summer intern at a local business.
•
Thus the student total cost will comprise the RS.30000 cash
cost as well as Rs.50000 opportunity cost.
ENGINEERING COSTS
•
Recurring and Nonrecurring costs:
•
Recurring costs refers to any expense that is know and
anticipated and that occurs at regular interval.
•
Nonrecurring costs are one-of-a-kind expenses that occur
at irregular intervals and thus are sometimes difficult to plan
for or anticipate from a budgeting perspective.
•
In engineering economics analysis, recurring costs are
modeled as cash flow that occur at regular interval.
Nonrecurring costs can also be handled if we are able to
anticipate their timing and size.
ENGINEERING COSTS
•
Incremental costs:
•
One of fundamental principles in engineering economics
analysis is that in choosing between competing alternatives,
the focus is on one difference between those alternative.
•
For example: You may be interested in comparing two car
lease options. In both of the cases (say case A and case B)
total car prices after lease time are same.
ENGINEERING COSTS
•
A cash cost is a cash transaction, or cash flow. If a company
purchases an asset, it realizes a cash cost.
•
A book cost is not a cash flow, but it is an accounting entry
that represents some change in value.
•
When a company records a depreciation charge of Rs.4
million in a tax year, no money changes hands. However, the
company is saying in effect that the market value of its
physical, depreciable assets has decreased by Rs.4 million
during the year.
•
Life-cycle costs refer to costs that occur over the various
phases of a product or service life cycle, from needs
assessment through design, production, and operation to
decline and retirement.
COST ESTIMATING
•
Engineering economic analysis focuses on future
consequences of present decisions and therefore one must
estimate all cost related variables
•
Estimates for engineering economic analysis include
purchase costs, annual revenue, yearly maintenance, interest
rates for investments, annual labor and insurance costs and
tax rates etc.
•
Types of Estimates
•
1. Rough Estimate
•
2. Semi-detailed estimate
•
3. Detailed estimate
COST ESTIMATING
•
Types of Estimates:
•
1. Rough Estimates: These are order of magnitude estimate used for
high level planning for determining project feasibility and in a project
initial planning and evaluation phase.
•
These estimates require minimum resources to develop and their
accuracy is -30 to 60%.
•
2. Semi-detailed estimates: These are used for budgeting purpose at
a project’s conceptual or preliminary design stage. These are more
detailed than rough but still require time and resources. Their
accuracy is generally -15 to 20%.
•
3. Detailed estimates: These are used during project detailed design
and contract bidding phases. These involve most time and resources
and thus are much more accurate than rough estimates. The accuracy
is general -3 to 5%.
COST ESTIMATING
Basic tools and techniques for cost estimates:
• Analogous or top-down estimates: Use the actual cost of a
previous, similar project as the basis for estimating the cost of the
current project.
• Bottom-up estimates: Involve estimating individual work items or
activities and summing them to get a project total.
• Parametric modeling: Uses project characteristics (parameters) in
a mathematical model to estimate project costs.
• Computerized tools: Tools, such as spreadsheets and project
management software, that can make working with different cost
estimates and cost estimation tools easier.
ESTIMATING
MODELS
1. Per unit model
2. Segmenting model
3. Cost indexes
4. Power-sizing model
5. Triangulation
6. Improvement and learning curve
ESTIMATING
MODELS
1. Per-unit model: It is a simple but useful model in which a cost
estimate is made for a single unit, then the total cost estimate
results from multiplying the estimated cost per unit times the
number of units.
• It is commonly used in construction industry.
•
Example:
•
Cost of Rs.1650 per square meter
•
Services cost per customer
•
Gasoline cost per km.
2. Segmenting model: It can be described as Divide and Conquer.
•
It partitions the total estimation task into segments. Each
segment is estimated, then the segment estimates are combined
for the total cost estimate.
ESTIMATING
MODELS
3. Cost indexes: It can be used to account for historical changes in
costs.
• The widely reported Consumer Price Index (CPI) is an example.
• Cost index data are available from a variety of sources.
• Suppose A is a time point in the past and B is the current time. Let
IV(A) denote the index value at time A and IV(B) denote the
current index value for the cost estimate of interest.
• To estimate the current cost based on the cost at time A, use the
equation:
• (Cost at time B)/ (Cost at time A) = [IV(B) / IV(A)]
• Cost at time B = [Cost at time A] * [IV(B) / IV(A)]
ESTIMATING MODELS
• Example: Akram is interested in estimating the annual labor and
material costs for a new production facility. He was able to obtain
the following labor and material cost data:
•
Labor costs:
• Labor cost index value was at 124 ten years ago and is 188 today.
• Annual labor costs for a similar facility were $ 575,500 ten years
ago.
•
Material Costs:
• Material cost index value was at 544 three years ago and is 715
today.
• Annual material costs for a similar facility were $ 2,455,000 three
year ago.
ESTIMATING MODELS
• Solution: Akram will use cost index equation for cost estimates for
annual labor and material cost.
ESTIMATING MODELS
4. Power-sizing model: It accounts explicitly for economies of scale.
• For example, the cost of constructing a six-story building will typically be
less than double the construction cost of a comparable three-story
building.
• To estimate the cost of B based on the cost of comparable item A, use the
equation:
• Cost of B = (Cost of A) [ ("Size" of B) / ("Size" of A) ] X
• where X is the appropriate power-sizing exponent, available from a
variety of sources.
• An economy of scale is indicated by an exponent less than 1. An exponent
of 1 indicates no economy of scale, and an exponent greater than 1
indicates a diseconomy of scale.
• "Size" is used here in a general sense to indicate physical size,
capacity, or some other appropriate comparison unit.
ESTIMATING MODELS
• Example: Akram wants to estimate the today’s cost of a 2500ft2
heat exchange system for the new plant being analyzed.
• He has the following data:
• His company paid $50000 for a 1000ft2 heat exchanger 5 years
ago.
• Heat exchangers within this range of capacity has a power sizing
exponent (x) of 0.55.
• Five years ago the Heat Exchanger Cost Index (HECI) was 1306; it
is 1487 today.
• Solution: Akram will use the following equation of power sizing model;
• Cost of 2500ft2 = (Cost of 1000ft2) [ ("Size" of 2500ft2) / ("Size" of
1000ft2) ] X
• where X =0.55
ESTIMATING MODELS
• Cost of 2500ft2 equipment = (50000) [ (2500) / (1000) ] 0.55.
• Cost of 2500ft2 equipment =$82,800
• Akram knows that the $82,800 reflects only the scaling up of the
cost of the 1000ft2 model to 2500ft2 model. Now he will use
following equation of cost index model to determine the today’s
cost of equipment.
ESTIMATING MODELS
• 5. Triangulation is used in engineering surveying. In this
technique surveyor is able to map points by using three fixed
points and horizontal distances.

• Triangulation in cost estimating might involve using different

sources of data or using different quantitative models to arrive at
the value being estimated.

• As decision makers we should approach our economic estimate

from different perspectives because such varied perspectives add
richness, confidence, and quality to the estimate.
ESTIMATING MODELS
• 6. Improvement and the learning curve:
• One common phenomenon observed, regardless of the task being
performed, is that as the number of repetitions increases, performance
becomes faster and more accurate. This is the concept of learning and
improvement in the activities that people perform.
• The learning curve captures the relationship between task performance
and task repetition.
• In general as output doubles the-unit production time will be reduced to
some fixed percentage, the learning curve percentage or learning curve
rate.
• For example: It may take 300 minutes to produce the third unit in first
production run involving a task with a 95% learning time curve. In this
case the sixth (2 x 3) unit during 2nd run will take 300(0.95) = 285
minutes to produce.
ESTIMATING MODELS
•
When thousands or even millions of units are
being produced, the learning curve effect is
ignored/vanished at a time/stage called steady
state.
• Steady state is the time at which the physical
constraints of performing the task prevent the
achievement of any more learning or
improvement.
 THE END
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