Chapter Six: Cost Estimation
Chapter Six: Cost Estimation
Chapter Six: Cost Estimation
Cost Estimation
Learning Objectives
Cost Estimation
Methods
• There are three cost estimation methods discussed
in this chapter:
– The High-Low method
– Work measurement
– Regression analysis (both linear and nonlinear models)
24,000
23,500
23,000
22,500
22,000
January February March April May June July
24,000
23,500
23,000
22,500
22,000
January February March April May June July
23,600
23,400
Maintenance Costs
July
23,200 April
23,000 June
Y = 16,525 + (1.80 x X)
Y = 16,525 + (1.80 x 3,600)
Y = 16,525 + 6,480
Y = $23,005 in maintenance costs
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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Work Measurement
Regression Analysis
Regression Analysis
(continued)
Y = a + bX + e
400
350
300
Regression for the data is
determined by a statistical procedure
250 that finds the unique line through
the data points, i.e., the one that minimizes
200 the sum of squared error distances.
400
350 e = 15
e = 7.5
300
e = 7.5 b = the slope of the regression line = the
coefficient of the independent variable
250 b = $0.75 variable cost per unit of output, X
a = 220
200 Fixed Cost = $220
Y = a + bX
Y = $220 + ($0.75 per unit 125 units)
Y = $313.75 = Estimated Cost, Month 4
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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Cons:
– Can be influenced strongly by unusual data points (called
outliers) resulting in a line that is not representative of most of
the data
– Most expensive and time-consuming method to implement
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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R-squared
P-values
R-squared = 0.461
SE = $221.71
t -value = 2.07
p -value = 0.090
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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R-squared = 0.772
SE = $161.27
t -values:
Hours = 2.60
Dummy variable = -2.33
p -values:
Hours = 0.050
Dummy variable = 0.070
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
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Data Requirements
Y = aXb
Chapter Summary