Budgeting Engineering Organizations, Like Most Other Types Term Paper

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Budgeting

Engineering organizations, like most other types of organizations, develop cost budgets that include all the resources they can track such as money, people hours, calendar time and space; both as initial investments and recurrent operational costs or future commitments (Gilb, 1997). However, according to Gilb, engineering organizations face unique challenges because it is often impossible to estimate a step cost budget until the following is known about a particular step:

The design ideas to be used, and their costs

The functionality to be changed, and their costs

The process for acquiring the step content, and its cost

The process for integrating and testing the step content, and its cost

The process for deploying the step content to the recipient, and its cost

Some organizations ignore costs while others attempt to deal with these unknowns in the budget process by turning to techniques such as design to cost (DTC) and cost as an independent variable (CAIV).

Often, product cost considerations are an afterthought in engineering (Crow, 2000). Costs are recorded and used as the basis for determining the product's price. However, Crow states that this approach leaves a company vulnerable to more budget savvy competitors. In other engineering organizations, cost receives greater consideration, but not until late in the development cycle. Projected costs of production are estimated based on drawings and accumulated from quotes and manufacturing estimates.

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If these forecasts are too high relative to competitive products or customers requirements, design changes are made to reduce costs either before or after the product has been released to production. The result can be lengthened development cycles and added development cost stemming from the design iterations.

A DTC management strategy centers on the projected average unit procurement costs with secondary interest on projected operations and support cost objectives (Geraldland, 1997). The objective of DTC is to " ... identify cost early in the life cycle, keep costs within acceptable tolerances; and, especially, to design to average unit procurement costs." In its implementation, the focus is to agree on average unit procurement costs to formulate the budget, design the program to stay within that budget and then update average unit procurement costs as the project transitioned from one step to the next.

A CAIV management strategy means that cost should be treated as an independent variable (Geraldland, 1997). An independent variable is one that is "fixed," and other variables react to the stability imposed by that independent variable. Under the CAIV philosophy, strong consideration must be given to stabilizing the costs of acquisition. CAIV calls for establishment of a process wherein the manager gives a continuous and….....

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