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Handbook of Budgeting, 6th Edition by William R. Lalli

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CHAPTER EIGHTEEN

Predictive Costing, Predictive Accounting

Gary Cokins, CPIM

SAS Institute

INTERNET FORCES THE NEED FOR BETTER COST FORECASTING

Electronic commerce (e-commerce) and business-to-business (B2B) are shifting power to the buyer from the seller. With the emergence of “exchanges and portals” and e-bidding and spot purchasing, suppliers are discovering that they must dynamically quote prices, ideally knowing the profit margin impact. Buyers will not wait days or hours for a quote. It must be at Internet speed. This is bringing pressure to bear on suppliers to have a rule-based predictive cost-estimating engine and modeling to test various assumptions.

Information technology computing power has made it possible for business analysts and planners to apply advanced methods to estimate the costs for alternative decisions. These methods provide more accurate answers than traditional cost-estimating methods that often simply extrapolate historical cost rates. However, these advanced cost-estimating methods come with a price: They require a greater administrative effort.

People who have been exposed to the new methods are asking:

  • At what point would I switch to the more advanced method?
  • How much of a difference in results is there between methods?
  • How much error will I incur if I do not switch?

In anticipation of debate, which will be fueled by software vendors who are adding stronger predictive functionality, more research is needed that will:

  • Describe, compare, and contrast ...

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