Making Strategic Short-Term Cost Estimation by Annualized Experience Curve

Abstract

For strategic purposes of setting price and productivity targets, organizations need to make projection of long-term cost as well as short-term cost estimation. For long-term cost estimation, organizations do rely on the experience curve among other methodologies. However, for short-term cost estimation, organizations rely more on cost accounting, budgeting, and engineering approaches. Why? This paper discusses major obstacles of using experience curve and develops an alternative concept of annualized experience curve. The annualized experience curve enables the estimation of current unit cost for the next period simply as function of the growth rate of next period’s production volume over that of current period. Thus, the annualized experience curve offers a viable alternative to other time-based percentage forecasting methods in use. When the annualized experience curve is used, it will likely bring an added benefit of including more experts from production and marketing areas in the process of cost estimation.

Keywords: Experience Concept and Curve, Short-Term Cost Estimation, Time-Based Improvement Methods, Strategic Costing, Moore's Law

JEL Classification: M29, M49