Title: Making strategic short-term cost estimation by annualised experience curve

Authors: Yu Sang Chang

Addresses: KDI School of Public Policy and Management, 87 Hoegiro Dongdaemun Gu, Seoul 130-868, South Korea

Abstract: For strategic purposes of setting price and productivity targets, organisations need to make projection of long-term cost as well as short-term cost estimation. For long-term cost estimation, organisations do rely on the experience curve among other methodologies. However, for short-term cost estimation, organisations 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 annualised experience curve. The annualised experience curve enables the estimation of current unit cost for the next period simply as function of the growth rate of the next period|s production volume over that of the current period. Thus, the annualised experience curve offers a viable alternative to other time-based percentage forecasting methods in use. When the annualised 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: annualised experience curves; short-term cost estimation; estimates; strategic costing; time-based improvements; Moore|s law; prices; pricing; productivity targets; long-term cost projections; cost accounting; budgets; budgeting; cost engineering; Gordon Moore; unit costs; growth rates; production volumes; time-based percentage forecasting; forecasts; marketing.

DOI: 10.1504/IJAMS.2010.033568

International Journal of Applied Management Science, 2010 Vol.2 No.3, pp.262 - 281

Published online: 06 Jun 2010 *

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