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INTRODUCTION Cost is a basic “yard stick” by which activities and assets are measured and compared. Because the word cost is so commonly used and generally related to monetary value, we may lose sight of its true meaning and importance as a cost engineering concept. This chapter is strategically located first in this Skills & Knowledge (S&K) textbook for the very reason that cost is a fundamental attribute of activities and assets. Cost is one of the three fundamental attributes associated with performing an activity or the acquisition of an asset. These are (1) price (cost), (2) features (performance), and (3) availability (schedule). The need to understand and quantify the attribute of cost spawned the engineering discipline of cost engineering. Cost engineering is the application of scientific principles and techniques to problems of estimation, cost control, business planning and management science, profitability analysis, project management, and planning and scheduling . While this definition seemingly addresses non-cost areas, it lists key engineering activities that either generate cost when they are performed or define plans or processes that cause (or influence) cost to be generated in other activities and/or assets. What are the elements that make up cost? How are these cost elements categorized and how do they relate to one another? Why is it important to collect and account for costs as they relate to specific activities and assets? And, finally, how do we apply these cost elements and categories to the insight for managing activities and assets? This chapter will provide you with a basic understanding of these cost fundamentals and will give you the insight and background you will need as you study the following chapters in this S&K textbook. LEARNING OBJECTIVES After completing this chapter, the reader should be able to: understand what makes up cost—i.e. the basic resources (material, labor, etc.) that are needed to perform an activity or create an asset; understand the distinction between cost elements that are directly applied to an asset and those that are indirectly applied; relate the cost elements to the life cycle of the asset: acquisition, use, and disposal; use the understanding of cost elements to further understand how cost is measured, applied, and recorded to arrive at the total activity and/or asset cost; and apply the knowledge gained to solve problems related to cost element source and definition. CONCEPTS Cost is the value of an activity or asset. Generally, this value is determined by the cost of the resources that are expended to complete the activity or produce the asset. Resources utilized are categorized as material, labor, and “other.” Although money and time are sometimes thought of as resources, they only implement and/or constrain the use of the physical resources just listed. The path by which resources are converted (via
and constructs the deck. erect deck. construction form work and expendable safety items. we think of labor as the value of the work needed to complete the activity or asset. The value of an art object is often related to the name of the artist. Another important aspect of cost relates to whether one is the producer or consumer of an activity or asset. The cost elements and categories associated with building this asset are shown in Table 1. When evaluating alternatives. nails. use of house to draw plans. the worker’s labor in painting the building or soldering an electrical contact. brushes. He draws up plans for the project. communication costs. i. shovel. For example. necessary to keep the facility available for use. gasoline . wife’s support in making lunch Other building permit fee. although the law limits profit on certain government procurements. incorporating a spell checker into word processing software saves (avoids) the labor of manual checking. etc. A fundamental addition is profit for the producer. turpentine. the foreman supervising the field work. Often. power saw. paint deck. and security costs. An intangible negative consequence might be the cost of missing an opportunity because resources were invested in another alternative instead of the more beneficial one. and the cost of transporting the material to the work site. deck screws. the value of the asset may also include the cost elements of scrap material or manufacturing spares. lumber. The cost categories just listed are those associated with the producer. or the technician that maintains the wave soldering equipment. Labor also includes the work of the engineer who prepares the design. paint. power drill. get permit. profit is established by market competition. which would include the tooling. pickup truck.1.a “project”) to activities and assets is illustrated in Figure 1. Generally. hauls it home. taxes. Normally you think of material as the physical composition of the asset. The “other” cost category consists of resources needed to support the activity and/or asset. The value of an asset or activity also may be related to intangible costs. travel costs..1. However. electricity. the value of each alternative should be assessed in terms of the benefits that can be expected if selected and the consequences that might be suffered if not selected . An intangible benefit might be an avoided cost if the alternative is selected. Notice that some of these cost elements are not part of the physical deck. drop cloth Labor draw plans. electricity. The “afforded” given the money and time allocated to the project. get materials. The following example illustrates the resource cost categories: Example 1—John decides to build a deck on the back of his house. construct footings.e. Other costs might be office supplies. gets the building permit from the city. and maintenance. buys the material. but are necessary in order to complete the project Category Cost Elements Materials drafting paper/pencil. An example would be the facilities needed to produce an activity or asset. concrete. The consumer has additional costs that add to the value of the activity or asset being acquired.