Cost Estimate Cost Analysis and Activity-Based Costing Term Paper

  • Length: 6 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #60973007

Excerpt from Term Paper :

Stadium Jumps" the writers discuss the cost of building a baseball stadium and renovating Robert F. Kennedy memorial stadium in Washington, D.C. The cost analysts note that the original cost estimate for the project was too low, and that the actual costs of completing the project could be as much as $91 million dollars more than originally anticipated. D.C. councilmen overseeing the project expect that the total costs for the project could climb as high as $486 million dollars, a problem as the original cost estimate was less than $400 million.

The cost estimate is off because it did not account for additional costs with regard to improvements for roads surrounding the stadium, addition of sewers and Metro routes, the money necessary to completely renovate the stadium and more than $30 million dollars in contingency funds for "the likely cost of overruns."

The problems associated with the poor cost estimate are many, including the need for heavy borrowing and an increase in debt service. The increased costs over and above the original cost estimate also do not include $40 million dollars in additional financing costs according to city officials.

One important aspect of cost estimation is determining whether or not the benefits of incurring costs outweigh the actual costs themselves. In the article city officials comment that they expect that in order to justify the added expenditures, it would be necessary for the city to raise more than 2 million additional dollars in revenue every year via gross tax receipts in order to pay off the debt. Many suggest in the article that the investment will eventually result in a net loss as the costs are likely to continue to "spiral upward with no end in site." Some have suggested that the plan is at best fiscally irresponsible.

In the article the cost estimate is one that will affect tax payers, thus the author suggests that a public hearing on financing legislation will be necessary to resolve the issue. Among the plans suggested for raising revenues including creation of a community investment fund that would be equivalent to $400 million in expenses, which could be used to among other things renovate schools and parks, by "harnessing the economic energy generated by a new baseball stadium."

The authors note that at this point in time it is not clear whether or not the city will be able to generate the revenues necessary to meet the new cost estimate.

This article was very well researched and grounded, revealing the many problems associated with improper cost estimation and analysis. It suggests the importance of noting all 'hidden' costs and allocating funds for unforeseen expenses when generating a cost estimate for any type of long-term or lengthy project. In this particular cost estimation project, the city officials basis for the initial project cost estimation were interviews conducted with officials from the D.C. sports entertainment commission, along with the D.C. Department of Transportation, Metro, and the Water and Sewer Authority.

The article would have benefited from comparisons of other cost estimates from similar projects so the reader could get a feel for the nature of the deal described. The author did suggest that the officials conducting the cost estimation reviewed previous large projects including creation of the Washington Convention Center and other stadiums, but did not provide details with regard to similar cost estimates thus did not provide enough detail to determine whether these comparisons were valid or accurate.

Cost Analysis

In the article "Life-Cycle Cost Analysis -- Evaluation and Investment Team" Keith Goodman discusses the process of life-cycle cost analysis, which involves evaluating the total economic worth of a usable project segment by "analyzing initial costs and discounted future costs ... over the life of the project segment." The author argues in favor of a life cycle cost analysis approach suggesting it is the best method for analyzing costs over time and assessing the overall value and benefit of a project, service or other commitments.

According to the author within the transportation department of the federal government, officials are increasingly under pressure to demonstrate the benefit of their services to taxpayers. The best way to do this according to the author is through life-cycle cost analysis. Thus many transportation agencies are investigating methods for justifying expenditures and looking at tools that can help them better determine what purchases are the most cost effects and which will benefit the public the most.

The author suggests that a life-cycle cost analysis, referred to as "LCCA" is the best approach for the Federal Highway Administration to deliver a proper synopsis of expenditures and evaluate the best ways to spend taxpayer investment. An LCCA offers the department a tool for considering all of the agency expenditures and costs over time as opposed to only during the initial investment period. The LCCA also offers the department the opportunity to determine and demonstrate the benefits of a particular service or alternative service in an economically sound manner.

Further according to the article a cost analysis will allow a structured approach to determining the costs of items over their lifetime, improving the department's ability to communicate with the public. The author closes by defining the steps of the life-cycle analysis process and the specific methodology steps to be employed by the transportation department should they adopt a life-cycle cost analysis methodology.

This article was very well grounded and described in adequate detail the life cycle cost analysis process. Most enlightening was the detailed analysis of the life-cost analysis process. The author provided a step-by-step analysis of how the LCCA works. First, he suggests that project teams use the LCCA process to "define a reasonable design or preservation strategy alternatives." Next the LCCA process would allow the team to identify initial construction activities and future maintenance activities for a particular project. From the information gathered a schedule of activities for each project alternative can be collected and assessed. Activity costs would be estimated based on the activities determined for each specific project.

The LCCA tool would allow estimation for direct agency expenditures including construction or maintenance activities, as well as user costs that might result from work zone activities. The objective of the process according to the article is to determine what the total life cycle costs are for each project alternative, as well as anticipated future costs so that potential investors have the opportunity to determine which project is best suited for minimizing expenditures and maximizing benefits over time.

The author also touches upon outreach programs that are also focusing on the application of LCCA to other projects and departments. Among the projects mentioned include a life-cycle cost analysis in pavement design. The steps outlined for successful implementation of an LCCA include establishment of alternative design strategies, activity timing, estimation of agency and user costs and determination of life cycle costs over time.

One thing the article did not discuss was actual examples of instances where LCCA had been used in other departments or other federal agencies successfully. The author makes a very clear case and is able to demonstrate the benefits of a cost analysis for predicting costs over the life cycle of a project. The argument would have been strengthened by some grounded examples of use of cost analysis in live situations.

Activity-Based Costing

In her article "Activity-Based Costing: "What Is It and How Can Reengineering Teams Use It" Nancy Maluso discusses the basics of activity-based costing (or ABC) and then offers a discourse on how it can be used to help reengineering teams. Specifically the author suggests that reengineering teams can use ABC to determine the costs and benefits associated with specific re-engineered processes and systems.

The author begins by defining activity-based costing as an "accounting methodology" that can be used to assign costs to activities instead of products or services. This is beneficial according to the author because it allows overhead costs and resource costs to be correctly assigned to the services or products that actually use them.

Maluso offers a graphic comparison of traditional costing methods vs. The ABC method, showing exactly how the ABC method can provide information about how costs are consumed. It doesn't according to the author, change or eliminates any of the costs one is likely to incur; rather it assigns costs to very individualized and specific activities so that the purchaser has a better idea of where money is being spent and what actions might be necessary to reduce costs in the long-term.

Maluso claims that traditional accounting systems are not accurate because they do not allocate costs correctly. Further the author suggests that high volume products and services may actually incur a large percentage of overhead costs but these costs aren't actually assigned correctly. Maluso goes as far as claiming that small batch and low volume products actually incur anywhere from 200 to 1000% more overhead than what is actually assigned them. Her analysis is used to justify the notion that products and services that a company might…

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