Predict future successes with cost estimation tools

The importance of cost estimation explained

Cost estimation is a vital part of cost management, and cost estimation tools should be used to get a grip on the (future) costs of a new product or service, and to gain insights into where improvements can be made to make what you sell, a success.

True cause and effect relations

Let’s start with the fact that any good cost estimation begins with knowing what the true cause and effect relations are between the desired outcome and the input needed to reach that goal. Simply put: if you want to go on a holiday to the Maldives, it’s best to figure out a few things before you even decide to go, like ticket, accommodation, rental car, and meal costs. The result is a cost estimation that would probably make you decide not to go to the Maldives, but that’s something we shouldn’t discuss here and now.

You have to find cause and effect relations and use the right cost estimation tools to be able to create accurate cost estimations

Cost estimation: a step by step process

In business, cost estimation works roughly the same, so you have to find cause and effect relations and use the right cost estimation tools to be able to create accurate cost estimations. CostPerform is very good at building driver-based cost models and offers various cost estimation tools that let you do just that, step by step:

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Step 1

Since the most used cause and effect relations are time and money-based, you first have to try and determine what extra effort is needed for the production/delivery of a (new) product or service. As soon as you know what effort is needed for a one-time performance, you can calculate it for the actual number of products/services you are projecting to sell.
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Step 2

The second thing you need to know for cost estimation is which resources will have to put in the effort, be it employees, machines, warehouses, software et cetera. In any case, knowing what resources are needed and to what extent, is vital for cost estimation.
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Step 3

Step three is setting a rate on those resources. Most of the time this is an hourly rate for an employee or a line-up of machines, but it can also be a one-time fee for a software license or rent for a warehouse. The key here is that not all costs are completely variable or completely fixed. And should questions like ‘at what point do I need an extra warehouse or machine line-up?’ arise, then CostPerform helps you with cost estimation in these situations as well.

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The final step

In the final step, you’ll have to asses if your overheads (like HR and/or Management department, et cetera) have enough staff to handle an extra product or service. If so, you need to make sure that the overhead costs are allocated to the new product/service in order to get a realistic and accurate cost estimation.
The fun really starts once you’ve set up a model that works with the cause and effect relations you’ve established

Let the fun of cost estimation begin

Once you’ve set up a model that works with the cause and effect relations you’ve established, the fun really starts. Thanks to CostPerform’s scenario function, one of our cost estimation tools, a mouseclick is all that’s needed to run cost estimation scenarios that let you discover the effect of rate, volume and cost level changes over several years, giving you more than just a glimpse of the future.

If you choose the right cost estimation tools to work with and manage to set up your cost estimation correctly, you can quickly and easily asses what the impact of a new product or service on profitability will be, so that you can avoid unpleasant surprises in the future. And if you manage to become really good at it, you can make that Maldives holiday a reality after all.

The conclusion on cost estimation (tools)

If you want to make sure that what you sell or going to sell in the future becomes a succes, cost estimation is what you need to do. It’s a vital part of cost management. The right cost estimation tools should be used to get a grip on the (future) costs of a new product or service, and to gain insights into where improvements can be made. For instance, to increase future profits and margins, or increase or decrease future volumes.

For any questions about cost estimation or cost estimation tools, please contact us.

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