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The engineering cost approach

- cannot be used when no past experience is available concerning activities and costs
- is based on an engineer's evaluation of the production methods
- classifies accounts as variable or fixed based on prior knowledge of how the cost behaves
- includes an analysis of what cost behavior should be

User PeterN
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Final answer:

The engineering cost approach involves mathematical models to estimate production costs and requires the breakdown of costs into fixed and variable categories. Fixed costs remain the same regardless of output, while variable costs change with production levels and typically increase as output rises. Cost normalization is vital for comparing different options.

Step-by-step explanation:

Understanding the Engineering Cost Approach

The engineering cost approach is an important concept in business, particularly in the fields of manufacturing and production. This approach is heavily reliant on the use of mathematical models to estimate costs associated with the production methods evaluated by an engineer. During the design process, these models help in forecasting costs for various options that emerge in the idea generation phase. Moreover, they play an essential role in making the connection between the science of a technique and the costs of materials, fabrication, manufacturing, operation, and maintenance.

When examining costs, it is fundamental to decompose them into fixed and variable costs. Fixed costs, such as rent or capital, do not change with the level of production and are considered sunk costs, irrelevant for future economic decisions. On the other hand, variable costs fluctuate with the level of production and typically show diminishing marginal returns, causing the marginal cost to increase as output levels rise.

For a methodical comparison of different production options, it's essential to normalize these costs to a standard measure, such as cost per thousand gallons of water, to ensure an apples-to-apples comparison across different technologies or solutions.

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