Historical costs

Standard costing is extensivelv used in budgetaiy-control systems. Criteria for the establishment of standards range from the maximum possible under ideal conditions to those expected under normal conditions. Past or historical costs are not always the best basis for setting up standards because past performance may have been unnecessarily inefficient. 

Cost Indices The value of money will change because of inflation and deflation. Hence cost data can be accurate only at the time when they are obtained and soon go out of date. Data from cost records of equipment and projects purchased in the past may be converted to present-day values by means of a cost index. The present cost of the item is found by multiplying the historical cost by the ratio of the present cost index divided oy the index applicable at the previous date. Ideally each cost item affected by inflation should be forecast separately. Labor costs, construction costs, raw-materials and energy prices, and product prices all change at different rates. Composite indices are derived by adding weighted fractions of the component indices. Most cost indices represent national averages, and local values may differ considerably. 

All cost estimates are based on historical costs accumulated from previous projects. This history can be in-house, from vendors, or from the literature. The accuracy of an estimate depends on how completely the project is defined, and on how well the costs from previous projects have been analyzed and correlated. If your company does not have good (or any) past project records, the literature abounds with correlations of cost data, as discussed later. However, this data must be used very carefully. 

Since the adjustments for inflation are so large, it is important to fix the date for historical data as closely as possible. For instance, a historical cost estimate from a vendor or contractor for equipment to be delivered in two years would have escalation built in, so the index should be for two years later, when the equipment was expected to be manufactured. However, data based on purchased equipment delivered on a certain date should use the index for the date the equipment was manufactured. 

Most costs quoted in this chapter are historical costs taken from the source indicated and therefore relate to different times over a period of about 40 years. No attempt has been made to correct for inflation, which could be misleading, as is discussed in the later part of the chapter. 

The method usually used to update historical cost data makes use of published cost indices. These relate present costs to past costs, and are based on data for labour, material and energy costs published in government statistical digests. 

The contribution of each of these items to the total capital cost is calculated by multiplying the total purchased equipment by an appropriate factor. As with the basic Lang factor , these factors are best derived from historical cost data for similar processes. Typical values for the factors are given in several references, Happle and Jordan (1975) and Garrett (1989). Guthrie (1974), splits the costs into the material and labour portions and gives separate factors for each. In a booklet published by the Institution of Chemical Engineers, IChemE (1988), the factors are shown as a function of plant size and complexity. 

A cost comparison conducted in 1993 found bioremediation to cost about 25 to 50% less than thermal extraction based on historical cost statistics (D14680P, p. 127). 

RAPID CAPITAL COST ESTIMATING METHODS 6.5.1. Historical costs... 

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UACHl ° To conduct CBA Historical Costs of drug, LOS, cost Quality of analgesia Evaluated both... 

Palladium is usually the prefeired metal of choice for aromatic aldehyde hydrogenation in neutral non-polar solvents such as hexane, DMF, or ethyl acetate (5-100 °C and 1-10 bar) although ruthenium, which is less active, can be considered and run in aqueous alcohol at similar temperatures and pressures. If higher pressures are accessible ruthenium may be preferable because of its lower (historical) cost. Its use has recently been reviewed [4]. Although platinum and rhodium could... 

Fig. 16.11 compares the payback time for the installation of sponge rubber ball mechanical cleaning of heat exchangers [EPRI 1987]. Although these data were again published in 1987 and will therefore include historical costs, they do indicate economic advantage in respect of the system. 

The open movement makes all of that possible. It holds the potential to spark remarkable innovation - and also turn historical cost structures and investment models on their ears. The Linux operating system, for example, is owned by no one, yet owned by everyone at the same time. 

The solution to this apparent paradox is, of comse, that the 6,000 that he has on 31 December 1998 is only worth the same as the 4,000 that he had on 1 Jantrary 1998— at least, in terms of its power to buy refrigerators. However, it illustrates graphically the distortion that can be introduced by the historical cost basis. 

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