What is the Estimated Cost?
For project-based businesses, cost projections become crucial; once quoted, the party has to adhere to the fixed-price contract. Every project incurs various planned and unplanned expenses. Therefore, businesses undertake a rough estimation before quoting prices. Similarly, in goods manufacturing, the evaluation of manufacturing expenses is paramount. Only then selling price and profit margins can be determined.
Key Takeaways
- An estimated cost is the overall expected future expenses incurred by a project or manufacturer. It is the statistical sum of fixed and variable expenses, including the labor, material, and capital employed in a project or goods manufacturing.It seems similar, but. It is completely different from the standard cost. The latter is determined scientifically, it is not an estimate.If Y is the total estimated cost, f is the fixed expense, v is the variable expense per unit, and X is the total number of units, then the formula for estimation is as follows:
Y = f + vX
Estimated Cost Explained
Determination of estimated cost helps in understanding long-term expenses, feasibility, returns, and risk in project management and capital budgetingCapital BudgetingCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds.read more. In construction, software and project-based companies use it as a crucial evaluation technique before quoting prices in front of clients. In such scenarios, the estimation becomes crucial; once quoted, the party must adhere to the fixed-price contract.
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For firms that produce goods or render services, the estimated cost of manufacturing becomes the bottom line for pricing. It helps manufacturers ascertain profit margins and a competitive selling price for various goods or services.
The estimated cost includes both fixed and variable overheads paid by a company—for manufacturing a product. It includes direct and indirect expensesIndirect ExpensesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses.read more incurred—labor, material, equipment, vendors, and facilities. Therefore, to determine the estimated cost, the following formula is used:
Y = f + vX
Here Y is the total cost.
- f is the fixed expense.v is the variable expense for each unit.X is the number of units produced or sold.
With a realistic, dependable, and precise estimate, an expense overrun or a budget overrun can be averted. The person who prepares the estimate is known as a cost estimator. There are a variety of estimators, further classified into construction estimators, electrical estimators, or chief estimators.
Expense estimation is necessary for computing the break-even point of a new undertaking—to analyze future profitsProfitsProfit refers to the earnings that an individual or business takes home after all the costs are paid. In economics, the term is associated with monetary gains. read more or losses before investing. It is also used for decision-making—whether a project is worth investing in. It is used to determine when the initial investment will be recovered. Simply put, this method gives an overview of the projected future expenses for a project or product. It is important to note that this is just a projection; the actual expense incurred by a business might differ.
Example
Let us assume that ABC Pvt. Ltd. is engaged in the manufacturing of calculators. If the company plans to add a new feature to the product, expenses will also rise. If the new fixed expense is $12000 for manufacturing 8000 calculators and the variable expense is $2 per calculator, what would be the estimated cost?
Solution:Given:
- f = $12000v = $2/calculatorX = 8000 calculatorsY = f + vXY = 12000 + (2×8000)Y = $28000
Thus, for manufacturing 8000 calculators, the estimated expenses will be $28000.
Standard Cost vs. Estimated Cost
Often, people get confused between standard cost and estimated cost—end up using the terms interchangeably. But, there are considerable differences between the two:
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This is a guide to what is Estimated Cost & meaning. We explain the formula to estimated cost of products/projects with examples and its differences from standard cost. You can learn more about it from the following articles –
It is a culmination of fixed and variable expenses incurred by a company—for manufacturing a product or accomplishing a project. It includes various financial expenses—resources employed for material, labor, and capital.
The following formula is used:Y = f + vXHere, Y is the total estimated expense, f is the fixed expense, v is the variable expense per unit, and X is the total number of units.
Following are the different techniques of expense estimation in project management:#1-Analogy Method#2-Engineering Method#3-Parametric Method#4-Actual Costs Method
Businesses evaluate the expenses involved in the manufacturing of a product or service. Estimation helps set a profit margin and sales price. In project management, this method gives investors an idea of the approximate expenses incurred in the completion of the project.
- Total Cost of OwnershipTotal Cost Of OwnershipThe total cost of ownership (TCO) is a management accounting concept that derives an asset’s total cost during its useful life.read moreLife Cycle CostingLife Cycle CostingLife Cycle Costing is a method that aggregates all costs that an organization or individual will incur over the life span of the asset, project, investment etc. It includes initial investment and any further investments such as operating cost, maintenance and repair, upgrades (recurring expenses).read moreContract CostingContract CostingContract costing is a contract between two parties known as a contractor and contractee. Specific job orders are undertaken for a relatively larger time frame, which may take years to complete, and the billing is done after finishing each milestone in the contract.read more