HKR study guide

Lecture 2: Cost Concepts and
Design Economics




Slide 1 of 54 Industrial &Production Engineering




Objective

The objective of Lecture 2 is to analyze short-term
alternatives when the time value of money is not a
factor.




Slide 2 of 54 Industrial &Production Engineering




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, Cost Estimating

Used to describe the process by which the present and
future cost consequences of engineering designs are
forecast.




Slide 3 of 54 Industrial &Production Engineering




Cost Estimating Used To
• Provide information used in setting a selling price
for quoting, bidding, or evaluating contracts
• Determine whether a proposed product can be
made and distributed at a profit (e.g., price = cost
+ profit)
• Evaluate how much capital can be justified for
process changes or other improvements
• Establish benchmarks for productivity
improvement programs


Slide 4 of 54 Industrial &Production Engineering




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, Cost Estimating Approaches


• Top-down
Top down Approach
• Bottom-up Approach




Slide 5 of 54 Industrial &Production Engineering




Top-down Approach

• Uses historical data from similar engineering
projects
• Used to estimate costs, revenues, and other
parameters for current project
• Modifies original data for changes in inflation /
deflation,, activity
y level,, weight,
g , energy
gy
consumption, size, etc…
• Best use is early in estimating process

Slide 6 of 54 Industrial &Production Engineering




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