Intermediate Cost Analysis and Management 1 If Cost is No Object Which Do You Want or if nobody knows the cost 2 Terminal Learning Objective Action Estimate Future Costs Given Planning Factors ID: 723698
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Slide1
Estimate Future Costs Given Planning Factors
Intermediate Cost Analysis and Management
1Slide2
If Cost is No Object Which Do You Want?
(or if nobody knows the cost)
2Slide3
Terminal Learning Objective
Action: Estimate Future Costs Given Planning Factors
Condition
:
You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and
actors
Standard:
With at least 80% accuracy:Demonstrate
understanding of Planning Factors conceptEstimate future costs in constant and current dollars
3Slide4
Cost Input to Decision Making
It is hard to make smart decision without cost informationThe next four slides are from the Army’s formal training program on Cost Benefit Analysis to be covered tomorrow
Parts will be highlighted here to give you some prior experience
4Slide5
Step 4: Develop Cost Estimate for Each Alternative
Cost estimate captures the total cost
of each alternative over its
relevant life cycle
Cost perspective vs. POM/budget perspective: Relevant life cycle often extends beyond POM/budget time horizon
Cost estimate includes both one-time and recurring costsOne-time: Costs of developing the solution and putting it in place
Recurring: Costs of performing the new process/solutionTo ensure apples-to-apples comparison of alternatives:Develop robust cost element structure or
work breakdown structure (a list of things that cost money) and use same structure for all alternativesDon’t change major elements – problem statement, assumptions, scope, etc – from one alternative to another
5Slide6
Guidelines and Tips for Cost Estimating
Begin with clear understanding of how each COA works and what resources are used to carry out the process … process map or flowchart can be very helpful
Use authoritative data sources
, to include:
Personnel costs:
Army Military-Civilian Cost System (AMCOS) *
Contract costs: Contracting officeInflation: Known price growth or ASA(FM&C) website *To help ensure you’ve captured all costs, be sure to consider:One-time and recurring costs
Roles of all relevant stakeholdersCosts associated with technology, safety, security, etcIncrease level of detail as needed. For example, you might need to segregate costs byMDEPs
AppropriationsCost categories (civilian personnel, military personnel, contracts, supplies, etc)
6
* URLs are in Resources section (slides 58-59)Slide7
Guidelines and Tips for Cost Estimating
(Cont.)
Develop supporting documentation that can stand alone to explain the cost estimate – a critical element for CBARB reviews
Current vs. constant dollars
Definitions
Current: Includes inflation
… the cost that will be incurred when the money is used. Also referred to as “then-year dollars” and “inflated dollars.”Constant: Cost with inflation removed.
Guidance:Develop cost estimate in constant dollars to support decision making. Ensures apples-to apples comparison of costs over time.Display cost estimate in current dollars to ensure decision maker is aware of impact on POM and budget.
7Slide8
CBA Costing Process
8
Establish Ground Rules and Assumptions
Identify Data Requirements and Sources
Develop Work Breakdown Structure
Obtain or Develop Detailed Process Map
Preparation
Prepare Back-Up Documentation
Review for Accuracy and Reasonableness
Conduct Sensitivity Analysis and Risk Assessment
Review and Validation
Develop the Cost Estimate
If you do all this, you’ll have a good cost estimateSlide9
LSA #1 Check on Learning
Q1. Which costs are to be included in the CBA?
A1.
Q2
. What is AMCOS?
A2.
9Slide10
LSA #1 Summary
During this discussion, we discussed making smart decisions that are based on accurate cost information, tips and guidelines for cost estimating, and the CBA costing process.
10Slide11
AMCOS
The cost of personnel is
HUGE
The costs of soldiers have frequently been ignored in the past
Access AMCOS with AKO or CAC log in at:
https://www.osmisweb.army.mil/amcos/app/home.aspx
Use AMCOS lite to generate the data on the following slides
11Slide12
Accessing AMCOS
12Slide13
Total Cost
13Slide14
Composite Standard Rate
© Dale R. Geiger 2011
14Slide15
AMCOS Total Cost Data by Rank
$K per Year per Soldier
E1
E2
E3
Military Compensation
Avg Cost of Base Pay (Military)
17.6
19.7
21.0
Military Compensation
Avg Cost of Basic Allowance for Housing (in cash)
8.8
9.6
10.9
Military Compensation
Avg Cost of Basic Allowance for Subsistence
4.7
4.7
4.7
Other Benefits
Avg Cost of Other Benefits
2.3
2.5
3.0
Permanent Change of Station Costs
Avg Permanent Change of Station-annualized ()
0.3
0.3
0.4
Recruiting Costs
Avg Recruiting Cost for MOS ()
24.1
24.1
24.2
Retired Pay Accrual
Avg Cost of Retired Pay Accrual
5.8
6.5
6.9
Selective Reenlistment Bonus
Avg Cost of Reenlistment Bonus (A and B Amortized)
0.0
0.0
0.0
Separation Costs
Avg Cost of All Separation Incentives
1.6
0.5
0.4
Special Pays
Avg Cost of Special Pays
1.0
1.0
1.1
Training
Avg Cost of Training (Total Amortized)
6.3
6.4
6.3
Total MPA (AMCOS)
72.5
75.4
78.9
$K per Year per Soldier
E1
E2
E3
Medical Support Costs
Avg Cost of Medical Support Cost6.76.86.5Morale, Welfare and Recreation CostsAvg Cost of Morale, Welfare and Recreation0.30.30.3Recruiting CostsAvg Recruiting Cost for MOS (Amortized)6.36.46.4TrainingAvg Cost of Training (Total Amortized)9.79.99.8 Total OMA (AMCOS)23.023.322.9
$K per Year per SoldierE1E2E3New GI Bill CostsAvg Cost of GI Bill30.930.930.9TrainingAvg Cost of Training (Total Amortized)3.53.64.3 Total Other (AMCOS)34.434.435.1
$K per Year per SoldierE1E2E3Total AMCOS129.9133.1136.9
MPA
other
OMA
15Slide16
The Composite Standard Rate is
Preferred
$K per Year per Soldier
E1
E2
E3
Military Compensation
Avg Cost of Base Pay (Military)
17.6
19.7
21.0
Military Compensation
Avg Cost of Basic Allowance for Housing (in cash)
8.8
9.6
10.9
Military Compensation
Avg Cost of Basic Allowance for Subsistence
4.7
4.7
4.7
Other Benefits
Avg Cost of Other Benefits
2.3
2.5
3.0
Permanent Change of Station Costs
Avg Permanent Change of Station-annualized ()
0.3
0.3
0.4
Recruiting Costs
Avg Recruiting Cost for MOS ()
24.1
24.1
24.2
Retired Pay Accrual
Avg Cost of Retired Pay Accrual
5.8
6.5
6.9
Selective Reenlistment Bonus
Avg Cost of Reenlistment Bonus (A and B Amortized)
0.0
0.0
0.0
Separation Costs
Avg Cost of All Separation Incentives
1.6
0.5
0.4
Special Pays
Avg Cost of Special Pays
1.0
1.0
1.1
Training
Avg Cost of Training (Total Amortized)
6.3
6.4
6.3
Total MPA (AMCOS)
72.5
75.4
78.9
$K per Year per Soldier
E1
E2
E3
Medical Support CostsAvg Cost of Medical Support Cost6.76.86.5Morale, Welfare and Recreation CostsAvg Cost of Morale, Welfare and Recreation0.30.30.3Recruiting CostsAvg Recruiting Cost for MOS (Amortized)6.36.46.4TrainingAvg Cost of Training (Total Amortized)9.79.99.8 Total OMA (AMCOS)23.023.322.9
$K per Year per SoldierE1E2E3New GI Bill CostsAvg Cost of GI Bill30.930.930.9TrainingAvg Cost of Training (Total Amortized)3.53.64.3 Total Other (AMCOS)34.434.435.1
$K per Year per SoldierE1E2E3Total AMCOS129.9133.1136.9
Composite Standard
Rates
other
OMA
42.1, 44.9, 48.5
16Slide17
Practical Exercise
The Garrison Commander wants to be assigned 20 E-4s to hand out towels in the gym. He is under budget pressure and feels he can replace several civilians with these “free” resources.
What is the total cost to the Army of this request?
20 E-4s * $123.8K per E-4 = $2,476K
What is the cost using Composite Standard Rate?
20 E-4s * $58.5K
per E-4 = $1,170K17Slide18
Practical Exercise
The Garrison Commander wants to be assigned 20 E-4s to hand out towels in the gym. He is under budget pressure and feels he can replace several civilians with these “free” resources.
What is the total cost to the Army of this request?
20 E-4s * $122.1K per E-4 = $2,442K
What is the cost using Composite Standard Rate?
20 E-4s * $58.5K per E-4 = $1,170K
18Slide19
Spreadsheet Exercise
What is the Total Cost and the Composite Standard Cost of the Non Deployable Soldiers in the nth Brigade?
E-2
E-3
E-4
E-5
E-6
E-7E-8
O-2O-3O-4
Total
14
123
153
89
51
28
6
19
12
4
499
19Slide20
Spreadsheet Exercise
20
Enter the appropriate data into the spreadsheet to calculate the cost of military personnel at the Standard Composite RateSlide21
Spreadsheet Exercise
21
Use the same data to calculate Total Cost of military personnelSlide22
LSA #2 Check on Learning
Q1. What is the difference between Total Cost and Composite Standard Rate?
A1.
22Slide23
LSA #2 Summary
During this lesson, we discussed the contents of the AMCOS website and briefly toured through it’s information.
23Slide24
Constant versus Current Year Costing
Most cost estimates will be put together using
constant dollars
This means they
ignore inflation
ARMY CBA policy wants decision makers to use this view to improve understanding
However, policy also calls for display of
current year dollarsThis means they include inflationBecause these are the dollars that must be budgeted in those years
24Slide25
Most cost estimates will be put together using constant dollars
This means they ignore inflationARMY CBA policy wants decision makers to use this view to improve understandingHowever, policy also calls for display of
current year dollars
This means they
include inflation
Because these are the dollars that must be budgeted in those years
25
Constant versus Current Year Costing (Cont.)Slide26
Inflation acts exactly like compound interest in a future value calculation:
Cost in nth Year = Constant Cost*(1+rate)n
$100 cost today will be $117
in current year dollars five years from now assuming 4% annual inflation
:
Cost in 5th Year = 100*(1+.04)
5
= 122
26
Constant versus Current Year Costing (Cont.)Slide27
Practical Exercise
The Garrison Commander wants to be assigned 20 E-4s to hand out towels in the gym. He is under budget pressure and feels he can replace several civilians with these “free” resources.
What is the total cost to the Army of this request in current year dollars three years from now at 5% inflation?
What is the cost using Composite Standard Rate in current year dollars three years from now at 5% inflation?
27Slide28
What is the total cost to the Army of this request in current year dollars three years from now at 5% inflation
?The cost expression is20 E-4s * Total Cost per E-4 * (1+rate)
number of years
20*$123.8K * (1.05)
3
$2,476K * (1.05)3
$2,476K * 1.158= $2,867K
28
Practical ExerciseSlide29
What is the total cost to the Army of this request in current year dollars three years from now at 5% inflation
?The cost expression is20 E-4s * Total Cost per E-4 * (1+rate)number of years
20*$122.1K * (1.05)
3
$2,442K *
(1.05)3$2,442K * 1.158
= $2,827.8K
29Practical ExerciseSlide30
What is the cost using Composite Standard Rate in current year dollars three years from now at 5% inflation
?The cost expression is:20 E-4s * Comp
Std
Rate per E-4 * (1+rate)
# of years20*$58.5K * (1.05)
3$1,170K * (1.05)3$1,170K * 1.158
= $1,355K
30Practical ExerciseSlide31
What is the cost using Composite Standard Rate in current year dollars three years from now at 5% inflation
?The cost expression is:20 E-4s * Comp
Std
Rate per E-4 * (1+rate)
# of years20*$58.5K * (1.05)
3$1,170K * (1.05)3$1,170K * 1.158
= $1,355K
31Practical ExerciseSlide32
Spreadsheet Exercise
What is the Total Cost and the Composite Standard Cost of the Non Deployable Soldiers in the nth Brigade over the next ten years in current dollars assuming 6% inflation.
E-2
E-3
E-4
E-5
E-6
E-7
E-8O-2O-3
O-4
Total
14
123
153
89
51
28
6
19
12
4
499
32Slide33
Total Cost
© Dale R. Geiger 2011
33
Enter Annual cost and Inflation rate to calculate Current Year dollarsSlide34
Total Cost (Cont.)
© Dale R. Geiger 2011
34
Sum of total current year costs of non-
deployables
over
ten years
= $913.43 million Slide35
Composite Standard Rate
© Dale R. Geiger 2011
35
Sum of Composite Standard Rate current year costs of non-
deployables
over
ten years = $391.89
million Slide36
LSA #3 Check on Learning
Q1. “Current-year dollars” refers to what?
A1.
Inflated or “Then-year” dollars.
36Slide37
LSA #3 Summary
During this lesson, we discussed Constant v. Current year costing and conducted a practical exercise
explaining
how to calculate
Constant Cost growth.
37Slide38
TLO Summary
Action: Estimate Future Costs Given Planning Factors
Condition
:
You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and
actors
Standard:
With at least 80% accuracy:Demonstrate understanding of Planning Factors
conceptEstimate future costs in constant and current dollars
38