Question

Why is so important to know the variety of costs to be considered in an engineering economic analysis?

Answer 1

Engineering economics, previously known as engineering economy, is a subset of economics concerned with the use and application of economic principles in the analysis of engineering decisions. As a discipline, it is focused on the branch of economics known as microeconomics in that it studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources. Thus, it focuses on the decision making process, its context and environment. It is pragmatic by nature, integrating economic theory with engineering practice. But, it is also a simplified application of microeconomic theory in that it avoids a number of microeconomic concepts such as price determination, competition and demand/supply. As a discipline though, it is closely related to others such as statistics, mathematics and cost accounting. It draws upon the logical framework of economics but adds to that the analytical power of mathematics and statistic

All engineering activities have an toward the cost and justification of any work or project. This means the engineer needs to be aware of what costs are important and how to determine the optimum way of doing things from an economic standpoint.

You have to know about capital cost, operating and maintenance costs, taxes, royalties or fees, the cost of interest and rates of return, present value concepts and payouts.

An engineering economic analysis may involve many types of costs. Here is a list of cost types, including definitions and examples.

A fixed cost is constant, independent of the output or activity level. The annual cost of property taxes for a production facility is a fixed cost, independent of the production level and number of employees.

A variable cost does depend on the output or activity level. The raw material cost for a production facility is a variable cost because it varies directly with the level of production.

The average cost is the total cost of an output or activity divided by the total output or activity in units.

A marginal cost is the variable cost associated with one additional unit of output or activity.

A sunk cost is a past cost that cannot be changed and is therefore irrelevant in engineering economic analysis. One exception is that the cost basis of an asset installed in the past will likely affect the depreciation schedule that is part of an after-tax economic analysis.

A recurring cost is one that occurs at regular intervals and is anticipated. The cost to provide electricity to a production facility is a recurring cost.

A nonrecurring cost is one that occurs at irregular intervals and is not generally anticipated. The cost to replace a company vehicle da