Cost Estimating and analysis do not exist in a vacuum. While it provides vital information to decision makers, the Body of Knowledge of cost estimating and analysis must therefore include much more than techniques for gathering data and using it to estimate costs. The cost estimator/analyst must be skilled in the broad application of systems analysis.

Neufville and Stafford define systems analysis as "a coordinated set of procedures which addresses the fundamental issue of design and management: that of specifying how people, money, and materials should be combined to achieve a larger purpose.''

Hitch and McKean list the elements of an Economic Analysis of systems as:

1. An objective or objectives.   3. Cost or resources used.    5. A criterion.
2. Alternatives                        4. A model or models
 
 David Novick succinctly characterized systems analysis as a sequence of events
 

"1. A problem is identified                3. Costs for the alternatives are evaluated
  2. Alternative solutions are                 (sometimes those alternative solution are
                                                          examined re-examined and a decision taken.)''

Systems analysis tends to be associated with the management of weapons systems acquisition programs, but the same process applies and is applied to acquisition and policy decisions at all levels of government and industry for all types of programs.

In some sense cost analysis is a subset of systems analysis; but, cost estimating and analysis are so entwined with all the elements of systems analysis that it is very difficult to address the cost without a systematic analysis of the problem. If we employ the concept of opportunity cost, we find that this situation is inevitable. The opportunity cost of some proposed allocation of resources is the value of those resources in their best alternative use. The concept of opportunity cost therefore requires knowledge of the organization's goals and objectives, measures of effectiveness, the other alternatives and the constraints placed on the organization. That is, to employ this basic concept of cost a systems analysis of  the problem must be accomplished.

Based on these considerations, the Society has chosen the following as a working definition of cost estimating and analysis:

Cost estimating and analysis is that portion of systems analysis dealing with the tasks of conceptual modeling, output and cost measurement, verification cost and output prediction, and evaluation and comparison of the costs of each alternative.

In a different context, cost estimating is all related models, techniques, tools, and data bases required to accurately predict the cost of an appropriately described item, product, program or combination thereof. Cost analysis is a somewhat broader collection of cost entities and activities that include cost estimating.

Associated with each task are the skills and techniques required to perform it. The skills and techniques necessary for the performance of the cost estimating and analysis tasks form the Body of Knowledge for this profession.
 

Basic Skills Body of Knowledge

These basic skill areas form the background knowledge for cost estimating and analysis. They are each rather broad areas of knowledge as opposed to particular techniques or concepts. Admittedly, it would be the exceptional cost estimator or analyst who was thoroughly proficient in all these basic skills. Generally, each basic skill can be acquired in one, two or three undergraduate college courses. The courses will ordinarily have similar titles. With the exception of calculus and computer science, the course would be at the intermediate and advanced undergraduate levels. Frequently these courses will be required in undergraduate programs leading to degrees in Business Administration, Industrial Management, Decision Sciences, Operations Research, or Industrial Engineering. However, it is unlikely that all these courses are required in any single degree program.
 

Operations Planning and Control Industrial Engineering Methods and Standards Systems Design Project Management Industrial Organization Econometrics Economics

Differential Calculus Computer Science Microeconomic Theory Managerial Economics Probability and Statistics Cost Accounting Technical Report Writing Public Speaking

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COST CONCEPTS

The remainder of the Body of Knowledge is more closely associated with the particular tasks of cost estimating and analysis. The first tasks associated with conceptual modeling are concepts of cost. The cost concepts are the elementary ideas about which cost estimating and analysis is concerned.
 

Not-to-Exceed Cost Opportunity Cost Direct Cost Indirect Cost Variable Cost Fixed Cost Average Cost Marginal Cost Incremental Cost Sunk Cost External Economies Life Cycle Cost Revenue Profit Recurring Cost Overhead Non-Recurring Cost Economic Life Economic Efficiency Differential Cost Direct Labor Incurred Cost Markup Rate Present Value of Money Time Value of Money Process Costing

Job Order Costing Constant Dollars Risk Uncertainty Internal Economies ROM Operating and Support Costs Then-year Dollars Theoretical Unit One Value Discounted Dollars Acquisition Costs Parametrics Allowable Costs Absorption Costing Break-point Burden Base-year Dollars Ceiling Price Cost Center Cumulative Average Unit Design-to-Cost Fee Forward Pricing G & A Imputed Costs Performance Factors

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DATA AND MEASUREMENT

The cost concepts with which the cost estimator or analyst would ideally work are frequently not measured precisely. As a result, cost estimators and analysts must work with data that are approximate measures of concepts. Cost estimators and analysts must fully understand the elements of data and measurement.

 

Labor Hour Standards Cost Accounting Systems and Standards Lines-of-Code By-product and Joint Product Costing Material Cost Accounting Labor Cost Accounting Standard Hour Cost Construction of Cost Factors Run Time Index Numbers Share-Line Transfer Pricing and Imputed Values Scrap Rate Sampling Techniques

Parametric Values Aggregation Theory (true lot mid points) Setup Time Measures of Effectiveness Proxy Variables  Escalation Gradient Method Cost Elements Work Breakdown Structures Alternatives Determination Cost Baseline Composite Labor Rates Contract End Items Contract Types

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ESTIMATION AND TESTING STATISTICAL THEORY

An important task of cost estimating and analysis is model estimation and testing. In this task the conceptual model together with the data and statistical assumptions are used to specify the statistical model. The coefficients of the statistical model are estimated, hypotheses are stated and tested and the validity of the statistical assumptions is investigated.

The skills required for this task include both the knowledge of statistical theory and the application of statistics to cost models.
 

Mathematical Cost Model Probability Density Functions (Normal, Chi Square, Student's "t,'' Binomial, Poisson) Multivariate Linear Regression Analysis Variance Weighted Average Non-linear Least Squares Confidence and Prediction Intervals Slopes Hypothesis Testing Residual Analysis Unit Curve Generalized Least Squares Unit Theory Autocorrelation and Time Series Analysis Systems of Equations Techniques Applications of Statistical Techniques

Learning Curves Cost Functions Cost Estimating Relationships Analogy Estimates Industrial Engineering Methods Scaling Comparison Estimating Crawford Improvement Curve Theory Grass-roots Estimate Linear Relationships Parameter Relationships Input-Output Model Production Functions Derived Demand Linear Programming Reliability Theory Probability Theory

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   ANALYSIS TECHNIQUES

An additional task consists of comparing the alternatives including their cost based on the criteria of the systems analysis. The particular techniques used for the comparison will depend on the issues under study, but the cost estimator or analyst must understand each of the techniques that may be used. Even if he or she is not the individual who compares the alternatives using these techniques, the estimator or analyst must ensure that the cost models are compatible with the comparisons.

Any particular cost study will, of course, require detailed knowledge of the relevant organization, its procedures and the alternatives under consideration. This knowledge is not common to all cost studies but will depend on the particular application of cost work.
 
 

Cost-Benefit Analysis Cost-Volume-Profit Analysis Discounting and Capital Budgeting Breakeven Analysis Cost-Effectiveness Analysis Contribution Analysis Decision Analysis Price Analysis Risk Analysis

Marginal Analysis Cost-Performance Tradeoff Analysis Integrated Logistics Support Analysis Sensitivity Analysis Monte Carlo Simulation Engineering Analysis Analysis of Analogues Emperical Estimating

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