Ships sink not because of the water around them, but because of water that gets inside them. Cost estimation is determining the expenses of a project and preparing a budget. It involves factors like labor, materials, and equipment. Common techniques include expert judgement, top-down estimation starting with total costs, bottom-up estimation starting with individual task costs, and parametric estimation using variables like work units and unit costs.

1. “Ships don’t sink because of the water
around them. They sink because of
the water that gets in them”

2. Production and Cost Estimation
Managerial Economics

3. It is the process by which inputs are combined,
transformed and turned into outputs.
Managerial Economics
Production
Three Types of Production:
• Primary Production
• Secondary Production
• Tertiary Production

4. Cost Estimation
Managerial Economics
It is the process of determining the cost of
program,project or operation. It is used to
forecast the expenses and prepare for a budget
for the project.
Factors that are involve in cost estimation:
• Labor
• Materials
• Machines
• Equipment and facilities
• Services
• Contingency costs

5. Cost Estimation Techniques
Managerial Economics
1.Expert Judgement
2.Top-down Estimation
3.Bottom-up Estimation
4.Cost of Quality Analysis

6. 2
Managerial Economics
1.Expert Judgement
It implies consulting with experienced cost estimators or specialists in the field
of your company’s performance.
When predicting costs by using this technique, you rely on experts’ knowledge
of the project’s contents and the general business environment.
This expertise can come from:
• A member of the project team
• A project stakeholder
• Subject matter experts
• The project manager

7. 2
2.Top-down Cost Estimation
Managerial Economics
It starts with the identification of the overall
scope of the project and its total cost.
The top-down approach basically uses
historical data from similar projects to
estimate the costs, revenues, and other data
for the current project by modifying these
data for changes.

8. It starts the cost calculation process with the
identification and evaluation of separate project
components.
The expenditures for every individual project task or a
series of tasks are then summed up to arrive at the total
project cost.
• It can be used estimate resources,duration and cost.
• Requires the maximum of time and effort to estimate.
Managerial Economics
3. Bottom-up Estimation

9. Managerial Economics

10. 4.Parametric Estimation
The total project cost is calculated based on the number and price of the
project’s sub-components, also known as work units.
Managerial Economics
The estimation process includes just 3 core steps:
• Identify relevant project units
• Estimate the cost of every unit by summing up the
price of materials, labor, etc.;
• Use the following equation to form the overall picture
of project expenses:
Number of Work Units × Cost of a Single Unit

11. Managerial Economics
Example: Five students will answer a test with 50
multiple choice question and each will take it
individualy.The past data shows that it takes 45
minutes to finish the test. How long will you need to
administer the 5 students?
Formula: Number of Work Units × Cost of a Single Unit
5 Students X 45 minutes= 225 minutes or 3 hours and 45
minutes

12. Managerial Economics
The purpose of the cost of quality (CoQ) analysis if to figure
out how much money is needed to meet the preset project
quality standards.
4. Cost of Quality Analysis
The CoQ calculation process comprises the following phases:
• Define project quality requirements and standards;
• Identify the cost of good quality (CoGQ): cost of activities needed to
prevent quality failures + costs of quality appraisal activities;
• Identify the cost of poor quality (CoPQ): expenses the project may incur
as a result of internal quality failures + expenses the project may incur as
a result of external quality failures
• Calculate the total CoQ with this simple formula: CoGQ + CoPQ

13. Managerial Economics
Formula: CoGQ + CoPQ
Example:

14. Why Cost Estimation is important?
Managerial Economics

15. Managerial Economics
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