1. 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

2. Cost Estimates & Accounting Principles
CTC 475
Cost Estimates & Accounting Principles

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

4. 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

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

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

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

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

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

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

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

14. 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)

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

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

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

19. 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

20. Your Personal Balance Sheet
Handout
Your Personal Balance Sheet

21. 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

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

23. Balance Sheet Assets – Liabilities = Net Worth or

24. Net Worth
Also known as equity

25. Company Example Balance Sheet
Balance Statement
Company Example
Balance Sheet

26. 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

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

28. 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)

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

30. Handout
Your Household Budget

31. Company Example Income Statement

32. 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)

33. 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)

34. 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.

35. Next lecture
Job Quotes
Present Economy Problems