Engineering Production Functions for Cost Estimation
17 Pages Posted: 19 Dec 2005
Date Written: April 28, 2005
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: Suggested Citation