Question

explain the difference between engineering method of cost estimation and the account analysis method.what is the risk and benefits of using each approach

Answer 1

Engineering method of cost estimation : This method breaks the thing to be costed into parts and/or assemblies, i mean to say such small parts.Each of which is then costed separately.It includes estimating cost of every activity in a break down structure, summing these estimates and adding appropriate overheads.It is a complex and highly detailed method where each step of workflow should be identified and measured.

Risks of Engineering method of cost estimation:

1.It is complex and time consuming.

2.It can be expensive to implement this method owing to continous changes in resources also have to incorporated in the system

3.New estimates for every possible alternatives

4. It is not flexible enough for the continous changing environment.

Advantages of Engineering method of cost estimation:

1. Gives good information about major cost contributors
2. It is unique and advanced method
3. As each step is so detailed it acts as an input for other processes.
4. Helps in cost control because of excessive detailing.

Accounting Analysis Method: In simple words it is a method of calculating the cost to produce a product.To calculate this we divide cost into Variable, fixed and mixed cost.and then cost is calculated using Linear Algebra.(y=mx+c)

Risks of Accounting Analysis Method :

1.It requires extensive knowledge of the production process of the company.

2. It is requires knowledge of advanced mathematics

Advantages of Accounting Analysis Method:

1. It is flexible for changing environment
2. It is less complicated than Engineering method of cost estimation
3. It helps to prepare data for financial information