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This method has the advantage of assessing costs based on actual project experience rather than theoritical assumptions. Such estimation may be conducted either top-down or bottom-up.
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Use reasoning and analogy to relate the actual costs incurred for elements of the completed project to similar elements in the current project. Take a completed project, similar in scope, size, structure, environment, constraints, and functions to the current project as its benchmark. Analogy CostingĪn analogy costing model is a non-algorithmic costing model that estimates the cost of a project by relating it to another similar completed project. Very often, a lack of clear-cut information on input costs impede this approach. This is a simple and straightforward, but laborious method. Such estimation may at times require application of statistical techniques such as regression analysis to relate the cost of obtaining the required outputs to important characteristics or attributes of the system, or to allocate the extent of joint costs to the specific activity. Total cost for the products is the sum of total input value for each variable. A basic cost estimation model identifies the unit costs of each input factor, determines the number of units of inputs required to generate the desired output, and multiplies unit cost with units required to obtain total input cost for the variable. The cost of manufacturing any product or undertaking any project is the sum of various input factors such as labor, material, and equipment. The top-down approach allows managers to consider all cost subsystems whereas the bottom up approach allows for a more detailed assessment Basic Model The bottom-up estimation models entail aggregating individual estimates for each task in the Work Breakdown Structure (WBS). The top-down approach entails the project manager charting out overall project size, functionality, process, environment, people, and required quality level, estimate macro level costs, and partition the estimate into a top-down work breakdown structure.
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The two broad approaches of cost estimation are the top down approach and the bottom-up approach.