bab vii cost estimation & budgeting process

8/13/2019 Bab VII Cost Estimation & Budgeting Process

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Chapter 7

Cost Estimation &

Budgeting Process

Erny Apriany SylwanaWidya Adi Nugraha

Fauzan Baskoro

Very Budiman

Harris


2/18

What is needed to develop a

budget?Forecast of:

What resources the project will require

Quantity of each

When they will be needed

How much they will cost (including the effect of potential

price inflation)

Uncertainty


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ESTIMATING PROJECT

BUDGET1. TOP-DOWN BUDGETING

2. BOTTOM-UP BUDGETING


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TOP-DOWN BUDGETING

A

B B

C C

D D D D

B

Estimators

Top-down budgeting is based on: Judgements and experiences of

top and middle managers

Available past data concerning

similar activities

Advantages:

Aggregate budgets can be often

developed quite accurately

Avoid overbudget

Weakness:

Potential debate with the lower

level managers

Small but important aspects

sometimes overlooked


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BOTTOM-UP BUDGETING

A

B B

C C

D D D D

B

Estimators

Bottom-up budgeting is based on:

Budgeting from detailed tasks in

terms of resources then

constructed following the EBS

Advantages: More accurate resources

management

Giving junior manager experiences

in budgeting process

Weakness:

Complex process

Potential overbudget because

preparation of cutted budget


6/18

WORK ELEMENT COSTING

Each work element in the action plan or WBS is evaluated

for its resource requirements and, and the cost of each

resource is estimated

This cost consist of:

1. Direct cost

2. Overhead

3. General & Administrative (G&A) charges

PM usually prepare 2 budgets:1. With overhead and G&A charges (to estimate profit)

2. Without overhead and G&A charges


7/18

ITERATIVE BUDGETING

PROCESS In combination of top-down and bottom-up budgeting

approach, Superiors (PMs) review the plan, perhaps

suggesting amandments (negotiation in action)

Resource requirements (ri

) and duration of each step (ti

)

from Superiors, in fact, different with budgeting from lower

level (ri & ti)

Iterative is time-consuming process, because it involve

superior & subordinate at all levels. But it allows a free flow

of ideas up and down the system. This iterative process willreduce uncertainty in budget estimations


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Category/Activity Budgeting vs.

Program Budgeting The traditional organization budget is either category oriented

or activity oriented

Often based upon historical data accumulated through an

accounting system

With the advent of project organizations, it became necessary

to organize the budget in ways that conformed more closely to

the actual pattern of fiscal responsibility


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Category/Activity Budgeting vs.

Program Budgeting Under traditional budgeting methods, the budget could be

split up among many different organizational units

This diffused control so widely that it was almost nonexistent

This problem gave rise toprogram budgetingwhich alters the

budgeting process so that budget can be associated with the

projects that use them


10/18

Program Budgeting

Program budgeting aggregates income and expenditures

across programs (projects)

Aggregation by program is in addition to, not instead of,

aggregation by organizational unit

These budgets usually take the form of a spreadsheet with

standard categories disaggregated into regular operations

and charges to the various projects


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Improving the Process of Cost

Estimation There are two fundamentally different ways to manage the

risks associated with the chance events that occur on every

project:

The most common is to make an allowance for contingencies -

usually 5 or 10 percent Another is when the forecaster selects most likely, optimistic,

and pessimistic estimates


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Funding Non profitable

Projects There are several reasons that firms would choose to fund a

project that is not profitable:

To develop knowledge of a technology

To get the organizations foot in the door

To obtain the parts or service portion of the work

To be in a good position for a follow-on contract

To improve a competitive position

To broaden a product line or a line of business


13/18

Learning Curves

In a cigarette manufactory, A product made in 70 man hour.

labor paid = $12/hour

estimated of 25 unit?

$25 unit * $12/hr * 70 hr/unit = $21000

Nope, its below $21000

Because Human LearnIts that true?


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Learning Curves

Experiences is a plus

More experiences = easy cost estimation, its fairly routine

Each time the output doubles, the worker hour per unit

decrease to a fix percentage of their previous value

The fix percentage called learning rate


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Learning Curves

If individual need 10 minutes to accomplish certain task

at first time, and only 8 minute in second time, it said

learning rate=80%

Time required to produce a unit of output

Tn The time required for the nthunit of output

T1 The time reguired for the initial output

N The number of units to be produced, and

RLog decimal learning rate/log 2

Total time required:


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Learning Curves

time

Number of

unit

Without allowance for learnig

Additional time used for

leaning


17/18

Learning Curves

Special case of LearningTechnological stock

If the parent organization is not experienced, performance measuressuch as time to installation, time to achive 80 percent etc are quiteuncertain

When we alter a system, we disturb it and it reacts in unpredictableways.

Other Factors

Project involve a tangible medium that tends not be under control

exp: a program with 1000 line code and 99,99% reliable just onlyworking about 36%

Mythical man-month

worker and time are interchangable

Adding manpower to a late software project makes it later


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Types of Estimation Error

There are two generic types of estimation error:

Random error - where overestimates and

underestimates are likely to be equal

Bias - a systematic error where the chance of

overestimating and underestimating are not

likely to be equal

bab vii cost estimation & budgeting process

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