Question

Managers use cost estimation to measure relationships based on previous costs incurred for the same production activity levels.

The four basic cost estimation methods are:

Industrial Engineering Method

Conference Method

Account Analysis Method

Quantitative Analysis Method

Choose one of these four methods to discuss in detail. In your main response posting, be sure to address the following elements for the method chosen:

Important information provided

Assumptions used

Advantages and/or disadvantages associated with the method

PLEASE ANSWER COPY AND PASTE NOT ATTACHMENT

ANSWER THROUGLY PLEASE

Answer 1

Account Analysis Method is the method most commonly used on the initial basis. Like many cost estimation methods here also Fixed Cost (FC) Elements and Variable Cost (VC) elements are identified. The costs are estimated and on that basis equation for Total Cost is determined in the form of TC = FC + m*VC, (m being no. of units) where VC is Variable Cost p.u. and FC is Total Fixed Costs.

Important Information Provided:

The various cost elements Material and Labor used, Other Production Costs (fixed and variable) like utility costs, factory rent costs etc. are required to be provided. All in all the fixed and variable costs are identified from historical costs data, basis which the costs elements can be informed of. That is, the costs incurred in the past are identified and are summarised in the form of an equation of fixed and variable costs. This historical costs data is generally retrieved from Financial Accounts Department.

Assumptions Used:

The costs will remain same as in past. The same cost elements and the same rate of usage can be taken to determine the future costs.

Advantages:

The data required is of past costs, which is easily available in comparison to the other methods. Thus, costs elements information is readily available.

It's a good method to be used for initial times for cost estimation. It is easy to use. and not very time-consuming in terms of determination cost elements.

Disdvantages:

Not all past costs are recurrent and the seasonal variation in costs may require a careful review on the part of the person identifying cost elements. For instance, Some costs might be incurred differently for different seasons, e.g. Utilities costs might be higher in winters. So those adjustments need to be considered while making the equation.

The new costs may not be considered in equation due to using only historical costs.

The rate of labor might also change from past due to learning curve effect. Same is not considered in this method.