Engineering economics is the process of forecasting the expenses or operating costs that must be incurred to manufacture a product or to provide a service. A cost analysis takes into consideration all the expenses that are involved in designing and manufacturing a product. A professional design engineer manages manufacturing costs, which requires physical data, whereas a cost estimate engineer compiles and applies the costing data to determine the final cost of the product. Engineers preparing for the FE exam should be familiar with engineering economic equations and calculations.
Purpose of Cost Analyses
Cost analyses play a significant role in the decision-making process that an engineer makes in selecting materials, methods, tools, and facilities. An understanding of the cost-estimation process is essential to ensure that decisions are based on reliable cost analyses.
Quantity takeoff and unit costs must be reasonably accurate to finalize the actual product cost. If a product is overpriced, it will negatively affect business. It is always better to analyze competitor pricing strategies for the cost assessment of the product. Our FE exam review courses provide accounting principles and cost analyses for selecting the best alternative.
Detailed cost estimates are prepared to:
· Determine the selling price of a product to ensure profit margin
· Examine the vendor’s quotations
· Check whether the product can be manufactured in house
· Determine the most economical process to manufacture a product
· Initiate means of cost reduction in existing production facilities
· Determine standards of production performance to control costs
Cost Estimating or Costing
Costing is the process of listing all expenses incurred in various functional departments during product development. Accounting systematically records all expenses to determine the final cost of a manufactured product. The work of costing begins at the pre-planning stage and ends only after the product has been sold out or has been handed over to the project owner.
Purpose of costing:
· To compare the actual cost with the estimated cost to understand whether the estimate had been realistic or not
· To find undesirable expenses that require corrective measures
· To change the selling price due to variations in material cost or labor cost
· To find the reasons for a loss or profit
· To formulate policies and plans for bidding on a new job
Differences between estimating and accounting:
· Estimating is the determination of the anticipated or probable cost of a product before production, whereas accounting is done only after production of the product has been completed
· Estimating is a highly technical job since the estimator should be well versed in factory methods, operation times etc. Costing consists of compiling data by an accountant
· Estimating provides predicted or standard costs; accounting gives actual costs
The above topics are covered in undergraduate engineering courses, but there is an opportunity to review the basics of estimating and accounting with School of PE’s Fundamentals of Engineering exam review courses.