Estimated Cost

An estimated cost is an approximate projection of future expenses incurred in goods production or completion of a project. It includes both fixed and variable costs like labor, material, and capital.

For project-based businesses, cost projections become crucial; once quoted, the party has to adhere to the fixed-price contract. Every project incurs various planned and unplanned expenses. Therefore, businesses undertake a rough estimation before quoting prices. Similarly, in goods manufacturing, the evaluation of manufacturing expenses is paramount. Only then selling price and profit margins can be determined.

• An estimated cost is the overall expected future expenses incurred by a project or manufacturer. 
• It is the statistical sum of fixed and variable expenses, including the labor, material, and capital employed in a project or goods manufacturing.
• It seems similar, but. It is completely different from the standard cost. The latter is determined scientifically, it is not an estimate.
• If Y is the total estimated cost, f is the fixed expense, v is the variable expense per unit, and X is the total number of units, then the formula for estimation is as follows:

Y = f + vX

Estimated cost refers to the computation and evaluation of all expenses that has been incurred during a particular production process of execution of project or any other activity undertaken by an organization. It is a very important step, which helps in production planning, budget estimation and various other decision making.

The process of preparing an estimated cost sheet involves quantifying various expenses related to overheads, raw material, labor, etc, which makes use of several techniques and procedures depending on the nature and complexity of the operation or project.

Determination of estimated cost helps in understanding long-term expenses, feasibility, returns, and risk in project management and capital budgeting. In construction, software and project-based companies use it as a crucial evaluation technique before quoting prices in front of clients. In such scenarios, the estimation becomes crucial; once quoted, the party must adhere to the fixed-price contract.

For firms that produce goods or render services, the estimated cost of manufacturing becomes the bottom line for pricing. It helps manufacturers ascertain profit margins and a competitive selling price for various goods or services.

However, it is to be noted that the concept of total estimated cost may not always be very precise and accurate because it may be influenced by other external factors like changes in the scope of the project, unforeseen situation, etc. The concept may give as much accurate result as possible provided the company does regular monitoring and control and stay within the planned budget.  

The estimated cost sheet includes both fixed and variable overheads paid by a company—for manufacturing a product. It includes direct and indirect expenses incurred—labor, material, equipment, vendors, and facilities. Therefore, to determine the estimated cost, the following formula is used:

 Y = f + vX

Here Y is the total cost.

• f is the fixed expense.
• v is the variable expense for each unit.
• X is the number of units produced or sold.

With a realistic, dependable, and precise estimate, an expense overrun or a budget overrun can be averted. The person who prepares the estimate is known as a cost estimator. There are a variety of estimators, further classified into construction estimators, electrical estimators, or chief estimators.

Expense estimation is necessary for computing the break-even point of a new undertaking—to analyze future profits or losses before investing. It is also used for decision-making—whether a project is worth investing in. It is used to determine when the initial investment will be recovered. Simply put, this method gives an overview of the projected future expenses for a project or product. It is important to note that this is just a projection; the actual expense incurred by a business might differ.

Let us understand the concept of total estimated cost with the help of a suitable example.

Let us assume that ABC Pvt. Ltd. is engaged in the manufacturing of calculators. If the company plans to add a new feature to the product, expenses will also rise. If the new fixed expense is $12000 for manufacturing 8000 calculators and the variable expense is $2 per calculator, what would be the estimated cost?

Solution:
Given:

• f = $12000
• v = $2/calculator
• X = 8000 calculators
• Y = f + vX
• Y = 12000 + (2×8000)
• Y = $28000

Thus, for manufacturing 8000 calculators, the estimated expenses will be $28000.

The above example shows in a very simplified manner, the calculation and estimation of the cost of producing a calculator. However, the actual process of estimated cost basis is quite complex and involves more complicated data gathering and calculation, depending on the size of the business or project , complexity of the operation or range of products and services produced.

Often, people get confused between standard cost and estimated cost basis—end up using the terms interchangeably. But, there are considerable differences between the two:

This is a guide to what is Estimated Cost. We explain it with example, differences with the standard cost and how to calculate it. You can learn more about it from the following articles –

• Total Cost of Ownership
• Life Cycle Costing
• Contract Costing