COST ESTIMATING,

PRESENT ECONOMY
STUDIES
INTENDED LEARNING OUTCOME:

• Identify the effect of cost for decision making.

• Solve problems involving present economic studies.
COST ESTIMATING

-the process by which the present and future cost

consequences of engineering designs are forecast.
Providing information used Determining whether a
in setting a selling price for proposed product can be
quoting, bidding, or made and distributed at a
evaluating contracts. profit.

Purposes of
Cost Estimating

Evaluating how much

Establishing benchmarks
capital can be justified for
for productivity
process changes or other
improvement programs.
improvements.
 Cost Estimating

“Top-Down” “Bottom-Up”

Uses historical data from similar engineering projects
to estimate the costs, revenues, and other data for the
current project by modifying these data for changes in
inflation or deflation, activity level, weight,energy
consumption, size,and factors.
A more detailed method of cost estimating. It attempts
to break down a project into small, manageable units and
to estimate their economic consequences.These smaller
unit costs are added together with other types of costs
to obtain an overall cost estimate.
Example:
A simple example of cost estimating is to forecast the expense of getting a Bachelor
of Science (B.S.) from the university you are attending.

Top-Down Approach:
Year Tuition, Fees, Room & “Other” Total Estimated
Board Expenses Cost for Year
1 $15,750 x 1.06 = $16,695 $5,000 $21,695
2 16,995 x 1.06 = 17,697 5,000 22,697
3 17,697 x 1.06 = 18,759 5,000 23,759
4 18,759 x 1.06 = 19,885 5,000 24,885
Grand Total $93,036

Assumptions:
Cost of attending a university for the current year is $15,750 and is anticipated to increase at
the rate of 6% per year and includes full-time tuition and fees, university housing, and a weekly
meal plan. Other expenses are the costs of books, supplies, and other personal expenses
which is assumed to remain constant at $5,000 per year.
Example:
A simple example of cost estimating is to forecast the expense of getting a
Bachelor of Science (B.S.) from the university you are attending.
Bottom-Up Approach:

Tuition and Books and

Supplies Living Expenses Transportation
Fees
• Tuition • Books • Rent • Fuel
• Activities • Duplication • Food • Maintenance
• Memberships • Supplies • Clothing on car
• Medical • Computer • Recreation • Insurance
Insurance rental • Utilities • Traffic tickets
• Lab fees • Software
PRESENT ECONOMY STUDIES

When alternatives for accomplishing a specific task are being compared over one year or
less and the influence of time on money can be ignored, engineering economic analyses are
referred to as present economy studies.
Present economy studies occur in the following situations:

1. Selection of Materials
2. Selection of Method to be used
3. Selection of Design
4. Selection of Site Location for a Project
5. Comparison of proficiency among workers
6. Economy of tool and equipment maintenance
7. Economy of number of workers.
Example 3.1
A machine part to be machined may be made either from an alloy of aluminum or steel.There is an order for
8,000 units. Steel costs P 3.80 per kg, while aluminum costs P8.70 per kg. If steel is used, the steel per unit weighs
110 grams; for aluminum, 30 grams.When steel is used, 50 units can be produced per hour; for aluminum, 80 units
per hour with the aid of a tool costing P640, which will be useless after the 8,000 units are finished.The cost of the
machine and operator is P10.80 per hour. If all other costs are identical, determine which material will be more
economical.

Solution: First determine the cost per piece.

Steel Aluminum
Material Cost (110/1000)*P3.80 =P0.418 (30/1000)*P8.70 =P0.261

Labor&Machine P10.80/50 =0.216 P10.80/80 =0.135

Tool - P640/8000 =0.080
Cost per piece =P0.634 =P0.476
Cost of 8000units =P5,072 =P3,808
Example 3.2
Two workers,A and B,produce the same product on identical machines.A receives P25.00
per hour and he produces 100 units per hour. B is able to produce 120 units per hour.The
machine rate or cost of operation of the machines used by them is P100.00 per hour.
(a) Determine the cost per piece for worker A.
(b) Determine the hourly wage of worker B in order that his cost per piece will equal that of A.

Solution:
100
a) Cost per piece for worker A = 𝑃25+𝑃
100
= 𝑷𝟏.𝟐𝟓
b) Let W = wage of worker B per hour so that his cost per piece is equal to that ofA.
Then,
𝑊 + 100
= 1.25
120
𝑾 = 𝑷𝟓𝟎
Example 3.3
A contractor has a job which should be completed in 100 days. At present, he has 80 men
on the job and it is estimated that they will finish the work in 130 days. Of the 80 men, 50 are
each paid P120.00 a day, 25 at P180.00 a day, and 5 at P250.00 a day. For each day beyond the
original 100days, the contractor ahs to pay P500.00 liquidated damages.
(a) How many more men should the contractor add so that he can complete the work on
time?

Solution:
a. Let N- number of additional men needed to complete the work on time.
Equating man-das, we have
𝑁+ 80 100 = 80 130
𝑁= 𝟐𝟒𝒎𝒆𝒏
 Example 3.3
A contractor has a job which should be completed in 100 days. At present, he has 80 men on the job and it is
estimated that they will finish the work in 130 days. Of the 80 men, 50 are each paid P120.00 a day, 25 at P180.00 a day,
and 5 at P250.00 a day. For each day beyond the original 100days, the contractor ahs to pay P500.00 liquidated damages.
(b) If of the additional men, 2 re paid P180.00 a day, and the rest at P120.00 a day, would the contractor save money by
employing more men and not paying the fine?
Solution:
80- men on the job 104- men on the job
No. of No. Daily Wage Total No. of No. Daily Wage Total
worker of ( in Pesos) worker of ( in Pesos)
s day s day
s s
50 130 P120 780,000 72 100 P120 864,000

Wages 25 130 P180 585,000 Wages 27 100 P180 486,000

5 130 P250 162,500 5 100 P250 125,000

Liquidate 30 P500 15,000 Total Expenses P1,475,000

d
Damages By employing more men the contractor saves
Total Expenses P1,542,500

P1,542,500-P1,475,000=P67,500