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Feb 2013Lesson 21 Financial Management Cost

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Feb 2013

Lesson 2.1: Financial Management: Cost Estimation
Budget Terms
Each of these terms has an official definition in budget execution.
TERM

DEFINITION

Budget Authority

"Budget Authority" is the authority granted by appropriations law to enter into obligations that will result in immediate or future outlays.

Commitment

A "commitment" is the administrative reservation of funds, usually by the local comptroller, in anticipation of a future obligation. A commitment is the response to a request for a spending action. It ensures that funds are available in the amount requested, in the correct fiscal year, and in the proper appropriation.

Obligation

An "obligation" is the legal reservation of funds to make a future payment of money.
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1. Analogy: Subjectively compares the new system with one or more existing similar system for which there is accurate cost and technical data.
Strengths




Quick
Inexpensive
Easy to change

Weaknesses



Subjective
Not as precise

2. Parametric: Sometimes known as the statistical method, this technique:
● Generates an estimate based on system performance or design characteristics.
● Uses a database of elements from similar systems.
● Differs from Analogy in that:
● Uses multiple systems.
● Makes statistical inferences about the cost estimating relationships (CER).
Strengths





Uses cost estimating relationships Easy to do "what-if drills"
Inexpensive

Weaknesses



Moderately subjective
Precision only as good as the data base

3. Engineering: "Bottom-up" method of cost analysis that is the most detailed of all the techniques and the most costly to implement. Each WBS element must be costed to build the cost estimate for the entire program.
Strengths




Very accurate in later stages of System
Development &
Demonstration
Limited subjectivity

Weaknesses




Very expensive
Very time-consuming
Difficult to do "what-if drills"

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Feb 2013

4. Actual Costs: Extrapolation from actual costs that were contracted for or actually incurred on that same system during an earlier period.
Strengths



Little subjectivity
Very accurate

Weaknesses



Little applicability
Budget may
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