Engineering Production Functions for Cost Estimation

17 Pages Posted: 19 Dec 2005

See all articles by Francisco M. Somohano

Francisco M. Somohano

University of Cantabria - Faculty of Business & Economics

Francisco J. Martinez Garcia

University of Cantabria - Department of Economics

Ana Fernández Laviada

University of Cantabria - Department of Economics

Date Written: April 28, 2005

Abstract

In those cases where business strategies are based upon diversified production or where economies of scope and data capture systems are not developed enough cost estimations must be done with available data of a limited output. Our research focuses on the analysis of information systems in such situations. We have performed costs estimations in a electrical resistance wires manufacturing with more than one thousand different outputs. The cause-effect analysis was based on time process as the cost driver for overhead cost allocation.

Because of the lack of current data from man-power based production stages, we used standard estimations involving past production orders and the theory of engineering production functions. Literature on the microeconomic theory objects the validity of these functions. Important problems exist such as the difficulty to obtain data.

We found this methodology to be appropriated for production scheduling, but inadequate for individual time process estimation, despite the fact that we had obtained production functions with a very high explanatory power. This is due to compensation errors in diary scheduling, but individual differences are excessive for costing in low net margin situations. On the other hand, if we use the functions for cost estimation and price determination, the figures obtained cannot be trusted when the decision of orders is accepted.

Nevertheless, scheduling proves very useful to rationalize the sequence of production orders and therefore to improve efficiency both of points of operation and of the plant as a whole.

Keywords: cost estimation, schedule, economies of scope, microeconomic theory

JEL Classification: M40, M46

Suggested Citation

Somohano, Francisco M. and Martinez Garcia, Francisco J. and Fernández Laviada, Ana, Engineering Production Functions for Cost Estimation (April 28, 2005). Available at SSRN: https://ssrn.com/abstract=871090 or http://dx.doi.org/10.2139/ssrn.871090

Francisco M. Somohano (Contact Author)

University of Cantabria - Faculty of Business & Economics ( email )

Santander 39005
Spain

Francisco J. Martinez Garcia

University of Cantabria - Department of Economics ( email )

Av. Los Castros s/n
Santander 39005, Cantabria 39005
Spain

Ana Fernández Laviada

University of Cantabria - Department of Economics ( email )

Av. Los Castros s/n
Santander 39005, Cantabria 39005
Spain

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