Here are the key points about risk and uncertainty in cost estimating: - Risk management is important to identify potential issues that could impact cost and schedule. This includes conducting a risk assessment. - Cost estimates should account for uncertainty since the future is unknown. This means providing a cost estimate as a probability distribution rather than a single point value. - Probability distributions, like Monte Carlo simulation, allow the cost estimator to provide information on cost uncertainty. For example, they can say there is an 80% probability the program will cost less than a certain amount. - Decision makers need this uncertainty information to determine contingency budgets. For example, a comptroller may want to know how much to budget to have an 80% confidence of

1. Dr. C.V. Suresh Babu

2. Consumer Behavior is the Process Involved
When Individuals or Groups Select, Use, or
Dispose of Products, Services, Ideas or
Experiences (Exchange) to Satisfy Needs and
Desires.

3. Issues During Stages in the
Consumption Process

4. Consumers’ Impact on Marketing
Strategy
• Understanding consumer behavior is good
business.
– Firms exist to satisfy consumers’ needs, so
– Firms must understand consumers needs to satisfy
them.
• The Process of Marketing Segmentation:
– Identifies Groups of Consumers Who are Similar to One
Another in One or More Ways, and
– Devises Marketing Strategies that Appeal to One or
More of These Groups.

5. Segmenting Consumers by
Demographic Dimensions
Demographics are Statistics That Measure Observable Aspects of a
Population Such As:
Age
Family Structure
Gender
Race and
Ethnicity
Geography
Social Class
and Income

6. Consumers’ Impact On Marketing
Strategy: Building Bonds With Consumers
• Relationship Marketing occurs when a company
makes an effort to interact with customers on a
regular basis, and gives them reasons to maintain a
bond with the company over time.
• Database Marketing involves tracking consumers’
buying habits very closely, and crafting products and
messages tailored precisely to people’s wants and
needs based on this information.

7. Marketing’s Impact on Consumers:
The Meaning of Consumption
Self-Concept Attachment
Helps to Establish the User’s Identity
Nostalgic Attachment
Serves as a Link With a Past Self
Interdependence
Part of the User’s Daily Routine
Love
Elicits Bonds of Warmth, Passion, or Other
Strong Emotion
Types of Relationships a Person May Have With a
Product:

8. Marketing’s Impact on Consumers:
Consumption Typology
Consumption Typology Explores the Different Ways
That Products and Experiences Can Provide Meaning
to People.
There Are 4 Distinct Types of Consumption Activities:
Consuming as Experience
Consuming as Integration
Consuming as Classification
Consuming as Play
An Emotional or Aesthetic
Reaction to Consumption Objects
Express Aspects of Self or
Society
Communicate Their Association
With Objects, Both to Self/ Others
Participate in a Mutual Experience
and Merge Self With Group

9. Marketing’s Impact on
Consumers
– Marketing and Culture
• Popular Culture
– Intangible and Tangible Objects
– The Global Consumer
• Global Consumer Culture
– Virtual Consumption
• Business to Consumer Selling (B2C Commerce)
• Consumer to Consumer Selling (B2B Commerce)
• Virtual Brand Communities
– Blurred Boundaries: Marketing and Reality

10. Marketing Ethics
Business Ethics are Rules of Conduct That Guide
Actions in the Marketplace - the Standards Against
Which Most People in a Culture Judge What is
Right and What is Wrong, Good or Bad.

11. Other Marketing Ethics Issues
• Do Marketers Create Artificial Needs?
– Response: Marketing attempts to create awareness that
these needs do exist, rather than to create them.
• Are Advertising and Marketing Necessary?
– Response: Yes, if approached from an information
dissemination perspective.
• Do Marketers Promise Miracles?
– Not if they are honest; they do not have the ability to
create miracles.

12. The Dark Side of Consumer
Behavior
Compulsive Consumption
>Behavior is Not Done by Choice
>Gratification is Short-Lived
>Strong Feelings of Regret or
Guilt Afterwards
Illegal Activities
> Consumer Theft (Shrinkage)
>Anti-consumption
– Culture Jamming
– Cultural Resistance
Consumed Consumers
> People Who Are Exploited for
Commercial Gain in the
Marketplace.
Addictive Consumption
> Gambling

13. Interdisciplinary
Influences
Experimental Psychology
Clinical Psychology
Developmental Psychology
Human Ecology
Microeconomics
Social Psychology
Sociology
Macroeconomics
Semiotics/Literary Criticism
Demography
History
Cultural Anthropology
Individual Focus
Social Focus

14. Two Perspective on Consumer
Research
Positivist
Approach
Objective
Prediction
Independent
Real Cause
Separation
Interpretivist
Approach
Socially
Constructed
Understanding
Contextual
Simultaneous
Shaping
Interaction

15. The Wheel of Consumer Behavior

16. • Definition
• What is Cost analysis?
• Purpose of cost estimating
• How are cost estimates used?
• Cost Concepts
• Cost Output Relation
• Role of Engineers in Business
• Types of Business Organizations
Discussio
n
(CentreforKnowledgeTransfer)
institute

17. Cost Analysis refers to the measure
of the cost – output relationship, i.e.
the economists are concerned with
determining the cost incurred in hiring
the inputs and how well these can be
re-arranged to increase the
productivity (output) of the firm.
In other words, the cost analysis is concerned with determining money value of inputs (labor, raw
material), called as the overall cost of production which helps in deciding the optimum level of
production.

18. 1-18
• It is an “Estimation of Costs”
• An analytical effort directed at calculating/projecting the
future cost of weapon systems – both an Art and a Science
– Incorporates several quantitative analysis techniques:
• Data Collection and Analysis
• Regression Analysis
• Learning Curves
• Risk Analysis
• Involves Micro and Macro views of a program
– Must understand from a micro-perspective how each cost
element relates to another – This is half the work!!
– Must also understand total cost implications
• Requires interaction with engineers, logisticians,
schedulers, all people involved in the program.

19. Purpose of cost estimating
 Translate system/functional requirements associated with
programs, projects, or processes into budget requirements
 Determine and communicate a realistic view of the likely
cost outcome, which can form the basis of the plan for
executing the work
 Develop a source of resource information for planning
purposes
 Provide a quantitative basis for management decisions
regarding optimal allocation of resources
19

20. 1-20
How Are Cost Estimates Used?
• Used as a source of resource information for planning purposes
– Provides a quantitative basis for management decisions regarding optimal
allocation of resources
• A cost analyst helps to decide which of the possible alternatives is more
desirable and recommends a course of action that will steer decision
makers towards it and away from undesirable alternatives
– Used as “financial advice”
• Budget decisions
• Program Managers

21. There are several cost concepts relevant to the business
operations and decisions and for the convenience of
understanding these can be grouped under two overlapping
categories:
1.Cost Concepts Used for Accounting Purposes
2.Analytical Cost Concepts Used for Economic Analysis of
Business Activities

22. Cost Concepts used for Accounting Purposes
Generally, the accountants use these cost concepts to study the financial
position of the firm. They are concerned with arranging the finances of the firm
and therefore keep a track of the assets and liabilities of the firm. The
accounting costs are used for taxation purposes and calculating the profit and
loss of the firm. These are:
 Opportunity Cost
 Business Cost
 Full Cost
 Explicit Cost
 Implicit Cost
 Out-of-Pocket Cost
 Book Cost
22

23. • With the increase in the size of the firm, the economies of scale also increase
and as a result the cost of per unit production comes down.
• There is a positive relation between the cost and the output, as the output
increases the cost also increases and vice-versa.
• Likewise, the price of inputs is directly related to the price, as the input price
increases the cost of production also increases.
• But however, the technology is inversely related to the cost, i.e. with an
improved technology the cost of production decreases.
• Thus, the cost analysis is pivotal in business decision-making as the cost
incurred in the input and output is to be carefully understood before planning
the production capacity of the firm.
23

24. Analytical Cost Concepts Used for Economic
Analysis of Business Activities
These cost concepts are used by the economists to analyze the likely cost of
production in the future. They are concerned with how the cost of production
can be managed or how the input and output can be re-arranged such that the
overall profitability of the firm gets improved. These costs are:
24
 Fixed Cost
 Variable Cost
 Total Cost
 Average Cost
 Marginal Cost
 Short-run Cost
 Long-Run Cost
 Incremental Cost
 Sunk Cost
 Historical Cost
 Replacement Cost
 Private Cost
 Social Cost

25. 25
In business, the manager must have a clear understanding of the cost-output
relation as it helps in cost control, marketing, pricing, profit, production, etc.
The cost-output relation can be expressed as:`
C = f (S, O, P, T)
where,
C =cost,
S = Size of the firm,
O = output,
P = Price and
T = Technology.

26. 1-26
These applications demand different types of forecasts,
generated with the different levels of detail available at
the relevant stage in the equipment’s life cycle.
When is Cost Analysis and Estimating Done
 Budget development, justification,
execution
 Program development and justification
 Balance of Investment studies of future
force mix
 Selection of equipment through AoAs
 Efficient management through equipment
life cycle
Acquisition
Budgeting
Fee for
Service ROI
Accountants
Budgets and
Finance
Capability
Managers
Capability
Developers
Capability
Supporters
Statisticians Acquirers
Engineers Operators
Test and
Evaluation
Operational
Planners
Govt & Review
Agencies
Logisticians
Supply chain
managers
Cost
Estimation
interfaces
Strategic
planning

27. 1-27
Why is Cost Estimating Done?
• Make decisions on program viability, structure, and resource requirements
• Establish and defend budgets
• Assess technology changes
• Provide basis for evaluating competing systems and /initiatives (cost/benefit analyses and
AoAs)
• Conduct analysis of alternatives (AoA)
• Perform source selection
• Perform design trade-offs
• Comply with public law
• Satisfy oversight requirements
• Identify and objectively quantify the impact of program risks (technical and schedule risks)
• Evaluate proposals for cost reasonableness
Cost estimating, as part of a total systems analysis,
provides an analytic underpinning to support
decision makers.

28. 1-28
As part of a total systems analysis, cost estimating helps
decision makers to:
• Make decisions on program viability, structure, and resource requirements
• Establish and defend budgets
• Assess technology changes
• Provide basis for evaluating competing systems and /initiatives (cost/benefit
analyses and AoAs)
• Conduct analysis of alternatives (AoA)
• Perform source selection
• Perform design trade-offs
• Comply with public law
• Satisfy oversight requirements
• Identify and objectively quantify the impact of program risks (technical and
schedule risks)
• Evaluate proposals for cost reasonableness

29. 1-29
Why Do We Care?
• DOD Directive 5000.1 and DOD Instruction 5000.2 specify the
policy and procedures to be used during the acquisition of
weapons systems
– Cost estimates are required in the Acquisition Process
• Resources are increasingly scarce and weapons systems are
increasingly expensive
– With budgets decreasing and costs increasing, informed decisions are
critical!
-- Estimating errors today are much more dangerous than

30. 1-30
Unit Cost Trends
0
50
100
150
200
1930 1950 1970 1990
B-1
C-5
B-58
B-52
B-17
$

31. 1-31
DoD Cost Estimating – The Basics
• Program Manager is responsible for preparation of program
office cost estimate
• Military service reviews program office cost estimate and forms
a Service Cost Position
• An independent cost estimate is required for all major defense
acquisition programs
• OSD CAIG estimate for programs of interest to SECDEF
• Service cost agency estimate for other programs
• The service cost position and the independent estimates are
presented to the Defense Acquisition Executive and the
Defense Acquisition Board

32. 1-32
Statutory and Regulatory Bases
for DoD Cost Estimates
• USC Title 10, Section 2432:
The SecDef shall report a full life cycle cost for each major defense acquisition program
(MDAP) ……
• USC Title 10, Section 2434:
The SecDef may not approve SDD, or the production and deployment, of a MDAP unless
an independent estimate of the full life-cycle of the program … [has] been considered by the
Secretary.
… the independent estimate … [shall] -- (a) be prepared by an office or other entity that is
not under … the military department … directly responsible for … [developing or acquiring] the
program; and (b) include all costs …. without regard to funding source or management control …
• DoDI 5000.2:
…the CAIG shall prepare an independent life-cycle cost estimate and report for all
milestone reviews after Milestone A (Program Initiation/Milestone B & C).
• DoD Directive 5000.4:
… the OSD CAIG is chaired by the Deputy Director, Resource Analysis, in the Office of the
Director, Program Analysis & Evaluation.

33. 1-33
Acquisition Process:
The New DoD 5000 Model
IOC
B
A
Technology
Development
System Development
& Demonstration
Production &
Deployment
Systems Acquisition
Operations &
Support
C
User Needs &
Technology Opportunities
Sustainment
• Process entry at Milestones A, B, or C
• Entrance criteria met before entering phase
• Evolutionary Acquisition or Single Step to Full Capability
FRP
Decision
Review
FOC
LRIP/IOT&E
Design
Readiness
Review
Pre-Systems Acquisition
(Program
Initiation)
Concept
Decision
Concept
Refinement

34. 1-34
Acquisition Categories
Criteria Designation Milestone Decision
Category (FY00$) Authority Authority
ID > $365M RDTE or USD(AT&L) USD(AT&L)
MDAP > $2.19B Proc or
so designated by
USD(AT&L)
IC same USD(AT&L) ASN(RD&A)
MDAP
IAM > $378M Lifecycle ASD(C3I) ASD(C3I)
MAIS > $126M Proc
> $31.5M Single Year
IAC same ASD(C3I) ASN(RD&A)
MAIS

35. 1-35
Overview of this Course
Cost)
l
(Historica
Cost
Future f


36. 1-36
Why Cost Analysis?
• Each Cost Estimate is different
-- Truly an Art
• Each requires a refined methodology
-- There are no “Black boxes”
• Each requires planning, insight, judgment and analysis of its own.
• The previous cost categories have a lot of uncertainty, so we look at
historical program costs to help us predict these costs for future weapon
systems.

37. 1-37
What do we mean by Cost?
• Manpower
• Hardware
• Training
• Program Management
• Systems Engineering
• Etcetera...
• No Matter What the Resource, it all boils
down to $$$$$$$$$$

38. 1-38
Scope of the DoD Cost Estimates
• Full Life Cycle Costs- all phases and elements of weapon systems
• Research Development Test & Evaluation
• Hardware and Software
• Supporting Data, Equipment, Training
• Initial Spares
• Military Construction (MILCON)
• Modifications
• Operations and Support Over System Life
• Including Manpower
• Environmental Cost -
• Compliance, Demilitarization, Clean-Up, Disposal
• Regardless of Funding Appropriation or Source
• Based Upon Program Described in the Cost Analysis Requirements Description (CARD)

39. 1-39
Understand
the
Assignmen
t
Define the Scope
• Cost Element
Structure
• Life Cycle Duration
Identify Data
Sources &
Collect Data
Generate Final
Documentation
/ Presentation
Perform Sensitivity
Analysis
Develop &
Document
LCC
Elements
Determine Cost
Estimating
Methodologies
LCCE Process

40. 1-40
The Cost Estimating Process
Definition &
Planning
Data
Collection
Estimate
Formation
Review &
Presentation
Final
Document

41. 1-41
Related Subjects We Will Discuss
• Types of Estimates
• Normalizing Data
• Work Breakdown Structure
• Acquisition Milestone Process
• Selecting Estimating Methodologies
• Software Development Costs
• Risk and Uncertainty Analyses
• Economic Analysis
• and many more...

42. 1-42
Data Collection
• Inherent Problems
• Data Sources
-- Where to Find Them
-- Internet
• Data Normalization
-- Compare “Apples-to Apples”

43. 1-43
Parametric Cost Modeling
• Parametric Cost Estimating Relationships
– Cost =  (technical, performance, schedule)
Supported by Statistics
Univariate Analysis
Bivariate Analysis
Multivariate Analysis
•Log-linear Analysis

44. 1-44
Non-Parametric Cost Modeling
• Analogy
• Expert Opinion
• Engineering Buildup
• Cost Factors
• Extrapolation from Actuals

45. 1-45
Statistics

46. 1-46
Risk and Uncertainty
• Risk Management
• Predicting Cost Uncertainty Probabilities
-- Cost not as a “Point Estimate”, but as a
Probability Distribution
-- Comptroller: “How much do I budget to be 80% sure of having
adequate funding?”

47. 1-47
Cost Risk
• A cost risk analysis is
modeled to compute the
most likely cost for a project
based on the individual cost
probability distributions for
WBS components
• A cost risk analysis presents the distribution of possible
costs based on the probability that risk to individual
elements may result in cost increases or decreases
• Cost risk is the inherent risk in estimating a Work
Breakdown Structure (WBS) component due to variances in
approaches, availability of data and schedule/performance
risks associated with a program

48. 1-48
The Effect of Time
• Time-Phasing Costs
-- How to “spread” cost over time?
• Cost Improvement/Learning Curves
• Differences Between Development and Production Costs
• Production Rate

49. 1-49
The Life Cycle
• Components of Life Cycle Costs are related to
project phases -
– Concept studies - Feasibility studies
– Project definition - Full development
– Production investment - Production
– Demonstration & acceptance - Operational
investment
– Operations - Support
– Post & continuing design - Disposal
IOC
Technology
Development
System Development
& Demonstration
Production &
Deployment
Systems Acquisition
Operations &
Support
Sustainment
FRP
Decision
Review
FOC
LRIP/IOT&E
Design
Readiness
Review
Pre-Systems Acquisition
Concept
Decision
Concept
Refinement

50. 1-50
Life-cycle cost categories
• These are categories commonly used by the Cost Analysis Improvement Group (CAIG). They are listed
in DoD 5000.4-M, Cost Analysis Guidance and Procedures.
• Research &Development (R&D): Estimated cost of all program specific research and development.
• Investment: Estimated cost of the investment phase, including total cost of procuring the prime
equipment; related support equipment; training; initial and war reserve spares; pre-planned product
improvements and military construction.
• Operating and Support (O&S): Estimated cost of operating and supporting the fielded system, including
all direct and indirect costs incurred in using the system, e.g., personnel, maintenance (unit and depot),
and sustaining investment (replenishment spares). The bulk of life-cycle costs occur in this category.
• Disposal: Estimated cost to dispose of the system after its useful life. This includes demilitarization,
detoxification, long-term waste storage, environmental restoration and related costs.

51. 1-51
Life-Cycle Cost Composition
• Guidance/Control
• Airframe
• Propulsion
• Avionics, etc.
• Non-recurring start-up
• Allowance for changes
FLYAWAY COSTS
Plus
• Tech Data
• Publications
• Contractor Services
• Support equipment
• Training equipment
• Factory training
WEAPON SYSTEM COST
PROCUREMENT COST
Plus
• Initial
Spares
Plus
• RDT&E
• Military
Construction
PROGRAM ACQUISITION COST
Plus
• Operations
• Support
LIFE-CYCLE COST

53. 1-53
Life-Cycle Phases and Their Relative Cost
Operations & Maintenance
Applied Research Validation EMD Limited Full Deployment/Operations
Advanced Technology Production Production
Assess Basic Exploratory Advanced Engineering
Mission Research Development Development Development
Need
Phase 1 Phase 3 Phase 4
Phase 0
Acquisition Phase
RDT&E Investment
Life-Cycle Cost
Operation Phase
Phase 2
Time
$
Potential for
LCC savings Cumulative LCC

54. 1-54
Cost Terminology
• Recurring Costs are those costs that are repetitive and occur
when a company produces similar goods or services on a
continuing basis. A fixed cost that is paid on a repeatable basis
is a recurring cost (i.e., rent). For example, for a company that
provides architectural services, office space rental - which is a
fixed cost - is also a recurring cost. Can be tied to Quantity
Produced.
• Nonrecurring costs are those costs that are not repetitive, even
though the total expenditure may be cumulative over a

55. 1-55
Cost Terminology
• Direct Costs are those costs that can be reasonably measured
and allocated to a specific output/product or work activity.
– Typical direct costs include the labor and material costs directly
associated with a product, service, or construction activity.
• Indirect Costs are those costs that are difficult to attribute or
allocate to a specific output or work activity. Costs that involve
too much effort to allocate directly to a specific output;
instead, they are allocated through a selected formula (i.e.,
proportional to direct labor hours or direct material dollars).

56. 1-56
Cost Terminology
• Fixed Costs are those costs which are unaffected by changes in
output quantity over a feasible range of operations for the
available production capability.
– Typical fixed costs include insurance and taxes on facilities, general
management and administrative salaries, license fees, and interest
costs on borrowed capital. These are Non-Recurring Costs.
• Variable Costs are those costs associated with production that
vary with quantity of output. Variable costs are the primary
costs that should be considered when making an economic
analysis of a proposed change to an existing operation.

57. 1-57
Cost Terminology
• Overhead Costs consist of plant operating costs that are not
direct labor or direct material costs. (Indirect costs, overhead,
and burden are terms that are sometimes used
interchangeably).
– Typical overhead costs include electricity, general repairs, property
taxes, supervision
– Various methods are used to allocate overhead costs among
products, services, or activities.
• Most commonly used methods involve allocation in proportion to direct labor
costs, direct labor hours, direct materials costs, the sum of direct labor and
material costs, or machine hours. (refer to example)

58. 1-58
Cost Terminology
• Sunk Costs are those costs that have occurred in the past and
have no relevance to estimates of future costs and revenues
for alternative course of action.
– Common to all alternatives, not part of prospective cash flows in the
future
– Can be disregarded in cost analysis
• Opportunity Costs are those costs incurred because of the use
of a limited resource. The opportunity to uses that same
resource to monetary advantage in an alternative use is

59. 1-59
Cost Terminology
• Standard Costs are representative costs per unit of output that
are established in advance of actual production or delivery –
“Expected” or “Pre-Determined” Cost
– Developed from the direct labor hours, materials, and support
functions (with their established costs per unit) planned for the
production or delivery process.
– Play an important role in cost management/control. Representative
uses include:
• estimating future manufacturing or service delivery costs
• measuring operating performance by comparing actual cost/unit with the
standard unit cost

60. 1-60
Cost Terminology
• Life-Cycle Cost: the Total Cost of the Acquisition and Ownership
of a System over its complete Life Cycle. (diagram)
– Begin with the identification of the requirement for the system and
end with its retirement and disposal costs.
– Time horizon is situation-specific and may be projected on a
functional or economic basis.
– DoD life-cycle costs can be decomposed into the following sub-
categories:
• development costs
• flyaway costs
• weapon system costs

61. • In Chennai is at Rs 89.7 per litre Today
In Mumbai is at Rs 93.83 per litre Today
• In Kolkata is at Rs 88.63 per litre Today
• In Delhi is at Rs 87.3 per litre Today
61

62. • The prices of petrol and diesel are determined by various
factors.
First the cost of crude oil, second the taxes the Centre and
states impose.
As for the everyday change in fuel prices, it's because of a
dynamic pricing system that reflects fluctuations in global oil
market.
62

63. • Calculation ESteem:-
-Basic OMC Cost Calculation
-Crude Oil including Ocean Freight
-Refinery Processing + Refinery Margins + OMC Margin + Freight Cost, Logistics
-Fuel Price after Processing (Ready to send to Petol Pump)
-Central Government Taxes & Dealer Commission
-Additional: Excise Duty + Road Cess as Charged by Central Government
-State Tax
-Commission to Petrol Pump Dealers
-Fuel Cost Before VAT
-VAT Calculation
-Additional:VAT
-Final Retail Price
• The price varies from one state to another state the reason is state tax and
additional VAT calculation
63