Cost model

From CEOpedia | Management online
Cost model
See also

Cost models are models that use simple formulas, functions or just simply equations for measuring, estimating and quantifying economic consequences, time and effort of applying required method. There is many variations of costs models, further are few examples to make it easier to understand the meaning of the cost model (Mislick & Nussbaum, 2015).

The travel cost model

The travel cost model is used when there is a need to estimate recreational use of the environment worth. It can value recreational loss or gain in examples such as closure off the beach to an oil spill or to estimate worth of improved waters quality in rivers. The travel cost model is usually applied in cases where recreation value is most important such as natural resources damage assessments and in benefit-costs analyses (Parsons, 2003).

The transaction cost model

This model is based on transaction cost theory which is known to say that a customer will choose to buy a product that have lower cost of transaction (Aubert, Rivard, 2004). In other words consumer will choose an option that helps save some money and take a better deal.

The cost estimation models

There are 5 most common cost estimation models:

  • Lang method - It is a method that differentiates liquids, solids and mixed liquids/solids. It does need a lot of detail information about the project to match specified factors to the exact project.
  • Hand method - This method is an extension of the Langs method. It does need even more information than the Lang method, because it is based on a system where every each of different factor needs to be used for specific equipment type such as vessels, columns or heat exchangers. It does not focus only on the type of a process but is more specified. Also it does exclude home office costs (HOC), indirect field costs (IFC), and OSBL costs.
  • Equipment factored estimating - This a method used to estimate total cost of equipment used in a project. It is done by multiplying such thing as „installation factor” by individual categories of process equipment. The installation factor includes costs such as materials that are needed to install the equipment or to use in a project and other subcontracted or direct costs of labor that are associated with the project (Arafa & Alqedra, 2011).
  • Parametric estimating - As a result of this process we get „Cost Estimation Relationships” (CERS) that is a set of formulary. These formulas are applied to manufacture outputs of costs for various components.
  • Factor estimating - is for when the idea is generated, but not specified as any plan, and costs of implementation needs to be discovered but there is no time or possibility for detailed estimate (Arora, 2012).
  • Detailed estimating also known as bottom-up estimating - This method is all about planning, scheduling and allocating resources. It is highly uneconomic from the viewpoint of time and money. It can be done by software for estimating costs or database of cost which is less time consuming, but it is only possible in case of MTO (Kumari & Pushkar, 2013). Usually it is used in case of a take-off, and then it requires a great knowledge about the activities that should be taken to reach the goal of successful planning and detail estimating. This method is usually used in the work breakdown structure (WBS) with little level and generally it goes with task lever or work package.


Author: Kamil Cała