📚 Learn Smart. Shine Bright!

Key Takeaways

[music] >> Hello and welcome to our topic number two cost estimation methods. Lesson one. This will be introduction. And also the non-mathematical methods. Cost estimation methods. This refers to methods to estimate future cost. Historical data is used to derive cost estimation methods. In cost estimation and forecasting, we assume the following. One, the variation in total cost can be explained by the variation of one or more cost drivers. For example, labor hours, machine hours, number of units produced, among others. This means that we are assuming that total cost, which is our variable, we can explain it or either it is cost by some factors like the what we produce, number of units we produce, the labor hours and the like. That is an assumption and which we are going to test in our coming lessons. And the second one is that the cost behavior can be approximated using a cost function. We can use just a cost function to estimate or either to portray that um cost behavior. Like now, the fixed cost as well as the variable cost. We can put them together and they form a cost a function. Now, the non-mathematical methods, which involve the industrial engineering cost analysis as well as high-low methods. We'll begin with the first one. The first one is industrial engineering methods. Now, this method entails the use of engineering analysis to establish the required levels of inputs for a particular level of outputs. This means if we have inputs if we can connect with output such that for different levels of outputs we would require different levels of inputs. And in this case means we require an expert that's why we are calling it as engineering methods an expert to determine for us for this number of units or for this quantity of output what do we require as our inputs to meet that output? That's where now the engineering comes in. The approach is very detailed lengthy and can be expensive though fairly accurate. The physical inputs established are converted into monetary uh value for decision making. Now, assuming that um we are having uh let's say some materials some labor hours and uh some other inputs. This we are saying that we can convert them from physical units into monetary value. So, if this are now in uh shillings then we are able to make decision because uh this being the cost we are incurring for a particular level of output. In fact, this one now uh would be uh for some output. So, we are able to now con- uh confirm that this cost uh is what we require to spend to make this output. So, we are able to make a decision based on the mon- monetary value, but not uh the physical units. It is the expert who will be able to project for us how many units we would would expect or we would have for us to meet this some output. And it is the application of this uh monetary value that we able to make some decision. And this value we can use it we can use the market value uh or the market cost. Then, this method is useful for estimating uh cost where inputs and outputs have clear relationships. That means if it is the materials, the labor hours, they would actually have a connection with some output. For example, if this this would increase, then you would expect also the output to increase. And vice versa. That's what we mean by clear relationship. That's the more we use of inputs, the more we have of output. Then, the uh this methods involves work study and production engineering techniques and seeks to establish what a cost uh should be, which is true. The the the work study, the engineering uh itself is now where we able to break down uh the requirements we need for this some output. And therefore, uh that one would require some expertise uh knowledge. There are some ad-