CTC 475 Review Inflation Inflation rate f is the rate of change in the value of currency (inflation/deflation) Inflation-free rate i represents a gain in purchasing power Inflation adjusted rate if is a combination of the above two rates

Cost Estimates & Accounting Principles CTC 475 Cost Estimates & Accounting Principles

Objectives Know the different types of cost estimates Understand balance sheets Understand income statements

Cost Estimates Many times costs for a project must be estimated Three general types Order-of-Magnitude (+/-50%) Preliminary Estimates (+/-20%) Detailed Estimates (+/-5%) As the precision of the estimate improves, the cost of making the estimate increases

Estimating Cash Flows Should be an organized approach: Work breakdown structure (tasks, subtasks) Cost and Revenue (life-cycle)

Estimating Models Cost Indices Unit Factor (index by year, area, etc.) (sq ft, LF of retaining wall, etc) Factor (sum of units; detailed breakdown)

Index Example Index for New York City is 1.26 Construction costs are 26% higher than upstate NY

Unit Technique House approximately 2000 sq ft Price approximately $55/sq ft Estimated Price=$110,000

Factor Technique-More detailed 2x4 Faucets Lights Plywood Shingles Etc.

Other ideas Bottom-up estimating Top down estimating (design to cost) Value Engineering-get input in design process for better design at lower cost

Estimate Example (Factor) Item numbers & Description Unit (CM, EA, LS) Quantity & Price Specifications describe how item is to be paid

Estimate Example Historical Costs can be found in company records or govt. documents (ex. Bid Price Book) Other Sources for prices (Means, manufacturer’s data, etc)

Estimate Example When project goes out to bid, each contractor creates an estimate The contractor with the lowest bid usually gets the job

Accounting Principles Primary function is recording, classifying, summarizing and interpreting the financial data of an organization

Two Basic Financial Reports Balance Sheet (Statement of Financial Conditions) Income Statement (Profit and Loss Statement)

Balance Sheet As of a particular date (snapshot in time): Tally Assets Tally Liabilities Assets – Liabilities = Net Worth Goal is to increase net worth over time

Your Personal Balance Sheet Handout Your Personal Balance Sheet

Assets Current – Can be converted easily into cash (<1 year) Work in progress Finished goods inventory Fixed – Cannot easily be converted into cash Land Building

Liabilities Current – Debts due and payable (<1 year) Account payable Notes payable Interest payable Fixed – Long term debt Bonds payable

Balance Sheet Assets – Liabilities = Net Worth or

Net Worth Also known as equity

Company Example Balance Sheet Balance Statement Company Example Balance Sheet

Depreciation / Book Value Depreciation Reserve: Funds held to repurchase an asset (building, machinery) when its useful life terminates Book Value (asset): First cost – depreciation reserve Many assets lose value over time

Income Statement The income statement is usually more useful of the two reports since: The annual revenues/costs for various elements are identified

Income Statement-Basic Format Sales Less Cost of Goods Sold= Gross Profit Less “All other expenses”= Net Profit (Before Taxes) Less Income Taxes = Net Profit (After Taxes)

Income Statement Over a particular time period (ex. year): Tally Income Tally Expenses Income – Expenses = Net Profit (loss)

Handout Your Household Budget

Company Example Income Statement

Cost Capacity (power law; sizing model) C2=C1*(Q2/Q1)^n C1 is cost at capacity Q1 C2 is cost at capacity Q2 n-an exponent (typical 0.6)

Learning Curve Used at the beginning of production when learning results in a savings of time (example-5% savings for every doubling of production is a 95% learning rate) TN=T1Ns s=log (learning rate)/log 2 (will be a negative number)

Activity-Based Cost Allocation-(ABC) Based on activities and cost drivers. Developed when labor costs reduced (automation) but indirect costs increased. Identify each activity and its total cost. Identify the cost drivers and their usage volumes. Calculate the indirect cost for each activity.

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