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Making strategic short-term cost estimation by annualised experience curve

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  • Yu Sang Chang

Abstract

For strategic purposes of setting price and productivity targets, organisations need to make projection of long-term cost as well as short-term cost estimation. For long-term cost estimation, organisations do rely on the experience curve among other methodologies. However, for short-term cost estimation, organisations rely more on cost accounting, budgeting and engineering approaches. Why? This paper discusses major obstacles of using experience curve and develops an alternative concept of annualised experience curve. The annualised experience curve enables the estimation of current unit cost for the next period simply as function of the growth rate of the next period's production volume over that of the current period. Thus, the annualised experience curve offers a viable alternative to other time-based percentage forecasting methods in use. When the annualised experience curve is used, it will likely bring an added benefit of including more experts from production and marketing areas in the process of cost estimation.

Suggested Citation

  • Yu Sang Chang, 2010. "Making strategic short-term cost estimation by annualised experience curve," International Journal of Applied Management Science, Inderscience Enterprises Ltd, vol. 2(3), pages 262-281.
  • Handle: RePEc:ids:injams:v:2:y:2010:i:3:p:262-281
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