CONSTRUCTION COST

ENGINEERING_PART 2
PRAYER BEFORE THE CLASS

Our most gracious and Heavenly Father, we praise

and thank you for this day. Watch over us as we go
about our work and studies. Fill our minds with
knowledge and help us understand the topic that we
are going to tackle today. Bless us, Father, with your
wisdom as we begin our class. Help us in every way
so that we may become the children you want us to
be. Amen
COST SYSTEM

A system for finding the

cost of production/activity

A practicable cost system is an

established routine through which
records of activities and the expenses
involved in the operation of the
processes are so analyzed and
classified and applied that every item
of the product will be charged with
exactly the share of the particularized
expenses that were required for its
production, no more, arid no less
COST

In Cost Engineering "Cost‘’ is always considered as the

sum or total of all expense elements involved in the
production and distribution of the items on which cost is
being considered up to the moment at which cost is being
determined. The elements of cost are ''expenses."
COST ACCOUNTING

• Classifying, recording and appropriate allocation of

expenditure for the determination of costs, the relation
of these costs to sales value and ascertainment of
profitability’ – Weldon
• ‘A measurement in monetary terms of the
amount of resources used for the purpose of
production of goods or rendering of services

It embraces the accounting procedures relating to the

recording of all income and expenditure and the
preparation of periodical statements and reports with the
object of ascertaining and controlling costs.
It is thus the formal mechanism by means of which costs
of products or services are ascertained and controlled.
COST ENGINEERING

Cost Engineering is the science of Cost

finding by analysis of the processes and
expenses of production, and the charging of
particularized expense factors, through
process unit rates, in the exact ratio of
utilization.

COST ENGINEERING is defined as the area of engineering

practice where engineering judgment and experience are
utilized in the application of scientific principles and
techniques to the problem of cost estimation, cost control
and profitability (American Society of Cost Engineers)
OBJECTIVES OF COST
ENGINEERING
1. To determine by analysis the cost per unit of the various
processes involved in the manufacture of the product.
2. To determine in a provable manner the cost of each lot
of product manufactured.
3. To determine the relative profitableness of the several
articles or lines comprising the range of products.
4. To show in analytical form the cost of each lot, that
unprofitable items may be isolated and studied with a view
to changing methods of production, specifications, or
prices so that the sale of each will yield a fair profit.
5. To show the relative cost of different lots of the same
article, for the purpose of revealing the most economical
methods of production, as a means of efficiency and
economy.
5 REASONS WHY YOU CAN’T DO A
PROJECT WITHOUT COST
ESTIMATING

1. Investment decision
It is critical to have a proper cost estimate as a basis
to determine the possible return on your investment.
The reason you start a project in the first place is to
guard or increase the company’s profitability. The
goal of the estimate is now to determine the required
budget, taking into account both the capital
investment and the future operational revenue and
expenses.
5 REASONS WHY YOU CAN’T DO A
PROJECT WITHOUT COST
ESTIMATING

2. Compare alternatives

A little bit further ahead in the project, you start to

scan for alternative plans. What is the best
location? How can we optimize the product or
facility to suit the market conditions? This leads to
multiple design alternatives that all need to be
priced.
5 REASONS WHY YOU CAN’T DO A
PROJECT WITHOUT COST
ESTIMATING

3. Validate vendors and contractors

When obtaining quotations from vendors and

construction contractors you want to validate their offer
and make sure all parties understand the scope of work.
By making a cost estimate, a client gains the ability to
challenge quotes and validate contractor’s estimates. It
strengthens your position, but requires significant effort
and understanding of locational effects and productivity
to get to an accurate figure.
5 REASONS WHY YOU CAN’T DO A
PROJECT WITHOUT COST
ESTIMATING

4. Cost control and earned value

During execution, the budget is made into a cost-

control document to track the project’s progress
and performance. It is during this time that a lot of
changes, risks and other events happen that
require you to adjust the budget and forecast what
the effects will be on the total project cost. To be
able to interpret what has actually been
accomplished in the field, which is not the same as
looking at the cash flow, requires skilled cost
engineers that understand both the scope of work
and the resources it requires.
5 REASONS WHY YOU CAN’T DO A
PROJECT WITHOUT COST
ESTIMATING

5. Evaluation and benchmarking

During and after execution you want to know how

well the project performs against a benchmark.
This might be an internal expected performance
or an industry standard. Either way, estimating
knowledge comes in handy in closing out the
project and learning from it to improve future
estimates.
ACCORDING TO “THE ABC OF COST
ENGINEERING”

In replacing a cost accounting system, with the planning and

installation of a Cost Engineering system, it is usual to find that
the clerical effort is lessened.

Cost Engineering corrects all of the inaccuracies of cost

accounting.

Cost Engineering is analytical. It analyzes and particularizes

where cost accounting amalgamates and generalizes.

Cost Engineering is practical while cost accounting is theoretical.

REVIEW OF COST ENGINEERING
AND ACCOUNTING PROBLEMS
Simple interest is calculated on the amount that was
originally borrowed, loaned or invested – the principal.
Interest accumulated in previous periods does not earn
additional interest.

F = P + I (eq. 1)
I =(iP)N (eq. 2)
Subs, the value of I in eq.2
F = P + (iP)N
F = P (1+ iN) (eq.3)

Where,
F = future value
P = present value
I= interest
i = interest rate
N = no. of periods
REVIEW OF COST ENGINEERING
AND ACCOUNTING PROBLEMS
Suppose you make a deposit of $100 in a bank account that pays
5% interest per year. After one year, you earn 5% interest, or $5,
bringing your total balance to $105. After one more year, since
simple interest is paid only on your principal, you again earn 5%
of the original $100. That means you earn another $5 in the second
year, and will earn $5 for every year of the investment. (Boundless
Finance, 2016). The diagram shows the interest the $100 deposit
earns each year and how that affects the total value of your
deposit. The next table shows account balances for this scenario
for the first 5 years.
Typically, the current account balance is called the present
value ($100 in period 0) and the account balance at some point in
the future is termed the future value ($125 in period 5).
Using the formula,
F = P (1 + iN)
F = 100 (1 + (0.05)(5))
F = 125
I = 125 – 100 = $25.00 (interest after 5 years)
REVIEW OF COST ENGINEERING
AND ACCOUNTING PROBLEMS
Compound interest is calculated on the total amount –
the principal and previously earned interest – in a given
period. In other words, compound interest
includes interest earned on interest, not just interest
earned on the principal, like simple interest does. The
interest period for compound interest is typically termed
the compounding period. For the same interest rate,
compound interest will always result in more total
interest than simple interest.
 REVIEW OF COST ENGINEERING
AND ACCOUNTING PROBLEMS
Suppose you make the same $100 deposit into a bank account
that pays 5% interest, but this time, the interest is compounded
annually. After the first year, you will again have $105. At the
end of the second year you also earn 5% interest, but this time it
is calculated based on your $105 balance. Thus, you earn $5.25
in interest in the second year, bringing your balance to $110.25.
In the third year, you earn 5% interest on your $110.25 balance,
or $5.51. Table shows how interest accumulates in the account
for the first 5 years.

F = P (1+i)^N
F = 100 (1+0.05)^5
F = 127.63

I = 127.63 – 100 = 27.63 (interest in 5 years)

REVIEW OF COST ESTIMATION
NEXT MEETING…

Assignment No.2

Basic Cost Engineering and Accounting

Deadline: August 25, 2023

Thank you!
PRAYER AFTER THE CLASS

Our most gracious and heavenly Father, Lord, thank

you for
giving us the opportunity to learn and the capacity to
understand. Let our knowledge be of service not only
for the
attainment of our goals but also for the benefit of
others.
Amen