CHAPTER 3 - Educators

98 CHAPTER 3/COST-ESTIMATION TECHNIQUES
In general, all other things being equal, the CER with better goodness of fit measures
should be selected.
EXAMPLE 3-9 Regression Statistics for the Spacecraft CER
Determine the SE and the correlation coefficient for the CER developed in
Example 3-8.
Solution
From the spreadsheet for Example 3-8 (Figure 3-7), we find that the SE is 41.35
(cell B15) and that the correlation coefficient is 0.985 (cell B12). The value of
the correlation coefficient is close to one, indicating a strong positive linear
relationship between the cost of the spacecraft and the spacecraft’s weight.
In summary, CERs are useful for a number of reasons. First, given the required
input data, they are quick and easy to use. Second, a CER usually requires very
little detailed information, making it possible to use the CER early in the design
process. Finally, a CER is an excellent predictor of cost if correctly developed from
good historical data.
3.5 Cost Estimation in the Design Process
Today’s companies are faced with the challenge of providing quality goods and
services at competitive prices. The price of their product is based on the overall
cost of making the item plus a built-in profit. To ensure that products can be sold
at competitive prices, cost must be a major factor in the design of the product.
In this section, we will discuss both a bottom-up approach and a top-down
approach to determining product costs and selling price. Used together with the
concepts of target costing, design-to-cost, and value engineering, these techniques
can assist engineers in the design of cost-effective systems and competitively priced
products.
3.5.1 The Elements of Product Cost and “Bottom-Up”
Estimating
As discussed in Chapter 2, product costs are classified as direct or indirect. Direct
costs are easily assignable to a specific product, while indirect costs are not easily
allocated to a certain product. For instance, direct labor would be the wages of a
machine operator; indirect labor would be supervision.
Manufacturing costs have a distinct relationship to production volume in
that they may be fixed, variable, or step-variable. Generally, administrative costs
are fixed, regardless of volume; material costs vary directly with volume; and
equipment cost is a step function of production level.
The primary costs within the manufacturing expense category include
engineering and design, development costs, tooling, manufacturing labor,