Cost Estimation

Methods
Managers were fairly confident about the direct material and direct manufacturing labor costs of the new styles of carpets.
They were less certain about the impact that the choice of different styles would have on indirect manufacturing costs.

Industrial Engineering
WHAT IS IT? Method
These methods differ with The industrial engineering
respect to how method, also called the
expensive they are to work-measurement
implement, the method, estimates
assumptions they make, cost functions by
and the information they analyzing the relationship
between inputs and
provide about the outputs in physical terms.
accuracy of the estimated Consider Elegant Rugs. It
cost function. They are not uses inputs of cotton,
mutually exclu- wool, dyes, direct
sive, and many manufacturing labor,
organizations use a machine time, and power.
combination of these Production output is of data, cost functions and
methods. square yards of carpet.
Time-and-motion
studies analyze the time
required to perform the
various operations to
produce the carpet.
Conference Method Account Analysis Method
The conference method The account analysis
encourages method estimates cost
interdepartmental functions by classifying
cooperation. The pooling various cost
of accounts as variable,
expert knowledge from fixed, or mixed with
different business respect to the identified
functions of the value level of activity.
chain gives the confer- Typically, managers use
ence method credibility. qualitative rather than
Because the conference quantitative analysis when
method does not require making these
detailed analysis cost-classification
decisions. The account
cost estimates can be analysis approach is
developed quickly. widely used because it is
However, reasonably accurate, cost-
effective, and easy to use.
High-Low
The simplest form of
quantitative analysis to
“fit” a line to data points is
the high-low
method. It uses only the
highest and lowest
observed values of the
cost driver within the
relevant range and their
respective costs to
estimate the slope
coefficient and the
constant
of the cost function. It
provides a first cut at
understanding the
relationship between a
cost driver and costs.