This is an idea about how cost estimation is done and preparation and also approaches of cost estimation

1. Preparation and
approaches of cost
estimates
Made by
Nagashree
Swikriti
Gauri
Sanjeevni

2. Preparation of cost estimates
 For executing the project the first requisition is to prepare a cost estimate of
the project for obtaining the approval of the component authority. To decide
the hand of authority to whom the proposal shall be kept up for approval, it is
necessary to know the cost of two proposal.
 The arrangement of fund for the project can be made only when the cost of
the project is known in advance. There may be various sources of finance
available such as internal resources, loan from government, loan from banks,
financial institutions, public deposit schemes, foreign loans, going in the open
market for selling the shares in the public and bonds to be sold to public ,
deferred payment arrangements , suppliers credit , arrangement of finance
on soft terms by the suppliers. Hence ,to prepare cost estimates of the
project in advance.

3. Continuation…..
 The cost estimates should be accurate. If project cost is overestimated then
project may fail and it will result in lower profitability and if the cost is
underestimated then the organization would face shortage of funds . So
accurate estimate is essential not only for successful completion of the
project but also to ensure it is adequate profitability components of the cost
may be .
 1)Equipment
 2)Civil Engineering works
 3)Structure
 4)Dismantling, erection , Listing and commissioning.

4. Continuation …..
 Cost can be divided into following parts :
 1)Fixed capital cost
 2)Operating cost
 3)Working Capital requirement cost.

5. Fixed capital cost
 Capital cost includes the cost associated with design plans , procurement of
equipment, construction and installation.
 Cost estimation can be performed based on preliminary survey and anaylsis of
the project .
 Capital cost is required for long term to create the production facilities
through purchase of fixed assets such as plant and machinery , land and
building , furniture etc.
 Capital is the life blood and nerve center of a business .
 No business can be started without an adequate amount of capital .
factors affecting the estimation of capital are:
 A) nature or character of the project
 B) size of the project
 C)scope of the project
 d) technology used

6. operating or production cost
 Operating cost refers to that cost is requires for actual production .
 Operating cost includes
 Raw material and fuel cost
 Utility , Electricity , stream and water.
 Emolument : operations, repairs and maintenance , supervision and indirect
labour
 Supplies and miscellaneous : operating supplies , repairs and maintainance
supplies , laboratories items , royalties and rentals.
 Contingencies
 Fixed cost : general work expension including taxes , insurance etc. and
depreciation.
 Loading , packing and shipping expenses including material and labour

7. Continuation ….
To the aggregate of the manufacturing costs. If the allocation of head office
administration , sales and general expenses are added the total will represent
operating cost .
Estimates of the production costs depend on the following factors .
 Availability of the information on such input requirement as material,
manpower and overheads.
 Prevailing labor legislation and local labor productivity rate.
 The total production program
 The work program (number of shifts , working days per annum)
 The type of technology and equipment to be applied.
 The skill of labor and staff called for
 The quality of inputs available based on which output is derived .

8. Working capital cost
 Working capital cost refers to that part of the firms capital which is required
for financing the short term or current assets such as cash , marketable
securities and inventories.
 Funds thus invested in current assets keep revolving fast and are being
constantly converted into cash and this cash flows out again in exchange for
other current assets. Hence it is also known as revolving or circulating capital
or short term capital .
 The working capital requirement of a concern depend upon a large number of
factors such as
 Nature or character of business
 Size of business/ scale of operations.
 Production policy
 Manufacturing process/length of production cycle

9. Continuation….
 Seasonal variations
 Working capital cycle
 Rate of stock turnover
 Credit policy
 Business cycle
 Rate of growth of business
 Earning capacity and dividend policy
 Price level changes
 Other factors

10. Continuation….
 To avoid the shortage of working capital at once , an estimate of working
capital requirements should be made in advance so that arrangement can be
made procure adequate working capital.
 The working capital is determined by estimating the investment in current
assets minus money , expected from current liabilities.
The following factors should be taken into consideration while
making an estimate of working capital requirements.
1) total cost incurred on material , wages and overheads.
2) the length of time for which raw materials are to remain in stores before
they are issued for production.

11. Continuation….
 3) time taken for conversion of raw materials into finished goods.
 4) the length of sales cycle during which finished goods are to be kept for
sales.
 5)the average period allowed of credit allowed to customers.
 6) the amount of cash required to pay day to day expense of the business.
 7) the average credit period expected to be allowed by suppliers.
 8) the average amount of cash required to make advance payments if any
 9) time lag in payment of wages and other expenses
Terminal cost :
 Terminal cost is generally labelled as commissioning or end of the tunnel cost.
these costs generally be insufficient and yet accountable

12. Approaches to cost estimates
Cost estimating is one of the most important steps in project management. A cost
estimates establishes the baseline of the project cost at different stages as
development of the project.
A cost estimates at a given stages of project development represents a
prediction provided by the cost engineer or estimator on the basis of available
data .
according to the American association of cost engineer , cost engineer is defined
as that area of engineer practices where engineering judgment and experience
are utilized in the application of scientific principles and techniques to the
problems of cost estimation, cost control and profitability.
Virtually all the cost estimation is performed according to one or some
combination of the following basic approaches.

13.  1) Production function :
In micro economics the relationship
between the output of a process and the necessary resources is
referred to as the productions functions . In construction the
production process can be expressed by the relationship between the
volume of the construction and a factor of production such a labour or
capital.
A production function related to the amount or volume of output to
the various output of labor , material and equipment. The relationship
between the size of the building project ( expressed in square feet) to
the input labour ( expressed in labour hours per square feet ) is an
example of a production function for construction.

14.  2)Emperical cost inference :
Empirical estimation of cost functions
requires statistical techniques which relate the cost of constructing or
operating the facility to a few important characteristics or attributes of
the system.
The role of statistical inference is to estimate the best parameter value
or constraints in an assumed cost function. Usually this is accomplished
by means of regression analysis technique.
 3)Unit cost for bill of quantities :
A unit cost is assigned to each of the
facility components or tasks represented by the bill of quantities. The total cost is
the summation of the quantities multipled by the unit cost.
The unit cost is straight forward In principle but quite labourious in application .
The initial step id to break down or disaggregate a process into a number of tasks.
Collectively these tasks must be completed for a construction of a facility.
Once these tasks are defined and quantities representing these tasks are assessed ,
a unit cost is assigned to each and then the total cost is defined by summing the
cost incurred in each tasks.

15. CONTINUATION…..
4) Allocation of joint costs :
allocation of costs from existing accounts may
be used to develop a cost function of an operations .The basic idea is this
method is that each expenditure item can be assigned to each characteristics
of the operations.
Ideally the allocation of joint costs should be casually related to the
category of basic costs in an allocation process. In many instances however a
casual relationship between allocation factor and the cost , item cannot be
identified or may not exists.