Cost Concepts and the Economic Environment

These flashcards cover the key vocabulary and foundational concepts regarding cost estimating, cost types, lifecycle phases, and economic demand and profit models from Chapter 2.

Cost Estimating

The process by which the present and future cost consequences of engineering designs are forecast.

Top-down Approach

A cost-estimating method that uses historical data from similar engineering projects to estimate costs, revenues, and other parameters early in the process.

Bottom-up Approach

A detailed cost-estimating method that breaks down a project into small, manageable units and adds their costs together to obtain an overall estimate.

Cash Cost

A cost that involves payment in cash and results in an actual cash flow.

Book Cost

A noncash cost representing the recovery of past expenditures over a fixed period of time; it does not involve a cash transaction.

Depreciation

The most common example of a book cost; it is what is charged for the use of assets like plant and equipment and is not a cash flow.

Sunk Cost

A cost that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action.

Opportunity Cost

The hidden or implied cost of the best rejected (foregone) opportunity.

Life-cycle Cost

The summation of all recurring and nonrecurring costs related to a product, structure, system, or service during its entire life span.

Investment Cost

Also known as capital investment, this is the money required for most activities of the acquisition phase of the life cycle.

Working Capital

Funds required for current assets needed for the start-up and subsequent support of operation activities.

Operation and Maintenance Cost

Recurring annual expense items associated with the operation phase of the life cycle.

Disposal Cost

Non-recurring costs associated with the retirement and shutting down of an operation.

Fixed Costs

Costs unaffected by changes in activity level over a feasible range of operations for the capacity available, such as insurance, taxes, and administrative salaries.

Variable Costs

Costs that vary in total with the quantity of output or other measures of activity level, such as materials and direct labor.

Recurring Costs

Repetitive costs that occur when a firm produces similar goods and services on a continuing basis.

Nonrecurring Costs

Costs that are not repetitive, typically involving the development or establishment of a capability or capacity to operate.

Direct Costs

Costs that can be reasonably measured and allocated to a specific output or work activity, such as direct labor and material.

Indirect Costs

Costs that are difficult to allocate to a specific output or activity, such as common tools, general supplies, and equipment maintenance.

Overhead

Plant operating costs that are not direct labor or material costs; also referred to as indirect costs or burden.

Prime Cost

A method of allocating overhead costs in proportion to the sum of direct labor and materials cost.

Standard Costs

Representative costs per unit of output established in advance of actual production and service delivery.

Incremental Cost

The additional cost that results from increasing the output of a system by one or more units.

Consumer Goods and Services

Products directly used by people to satisfy their wants.

Producer Goods and Services

Products used in the production of consumer goods, such as machine tools, factory buildings, and farm machinery.

Utility

A measure of the value which consumers of a product or service place on that product or service.

Demand

A reflection of utility represented by price per quantity of output, often modeled as $p = a - bD$.

Total Revenue ($TR$)

The product of price and quantity demanded, calculated as $TR = aD - bD^2$.

Profit Maximization ($D^*$)

The output level where total revenue exceeds total cost by the greatest amount, occurring where marginal cost equals marginal revenue.

Breakeven Point

The points ($D'_1$ and $D'_2$) where total revenue equals total cost ($TR = Ct$).

Design for the Environment (DFE)

A green-engineering approach focused on waste prevention, improved materials selection, and the reuse and recycling of resources.

Present Economy Studies

Economic studies conducted when alternatives are compared for a period of one year or less, making the time value of money irrelevant.