Engineering Economic Analysis

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540 ACCOUNTING AND ENGINEERING ECONOMY

Engineering economy focuses on the financialaspects of projects, while accountingfocuses

on the financialaspectsof firms.Thus the applicationof engineeringeconomyis mucheasier

if one has some understanding of accounting principles. In fact, one important accounting

topic, depreciation, was the subject of an earlier chapter.

THE ROLEOF ACCOUNTING

Accounting data are used to value capital equipment, to decide whether to make or buy a

part, to determine costs and set prices, to set indirect cost rates, and to make product mix

decisions. Accounting is used in private-sector firms and public-sector agencies, but for

simplicity this chapter uses "the firm" to designate both. Accountants track the costs of

projects and products, which are the basis for estimating future costs and revenues.

The engineeringeconomy,accounting,and managerialfunctionsare interdependent..

As shown in Figure' 18-1, data and communications flow between them. Whether carried

out by a single person in a small firm or by distinct divisions in a large firm, all are needed.

·Engineering economy analyzes the economic impact of design alternativ.esand

projects over their life cycles.

·Accounting determines the dollar impact of past decisions, reports on the economic

viability of a unit or firm, and evaluates potential funding sources.

·Management allocatesavailableinvestmentfunds to projects, evaluates unit and firm

performance,allocatesresources,and selectsand directspersonnel..

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FIGURE 18-1 The accounting, managerial, and engineering economy functions.

Accounting for Business Transactions

A business transaction involves two parties and the exchange of dollars (or the promise of

dollars) for a product or service. Each day, millions of transactions occur between firms

and their customers, suppliers, vendors, and employees. Transactions are the lifeblood of f

the business world and are most often stated in monetary terms. The accountiQ.gfunction

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records, analyzes, and reports these exchanges.

Transactions can be as simple as payment for a water bill, or as complex as the inter-

national transfer of millions of dollars of buildings, land, equipment, inventory, and othe1"

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Accountil1g. MlDagemel1t .. .,Engifi;;ringEcort6my

About past About past and future About future

Analyzing Capital budgeting Feasibility of alternatives

Summarizing Decision making Collect/analyze data

Reporting Setting goals Estimate

Financial indicators Assessing impacts Evaluate projects

Economic trends Analyzing risk Recommend

Cost acquisitions Planning Audit

Controlling Identify needs

Record keeping Trade-offslconstraints

Data and Communication Data and Communication

Budgeting Data and Communication Estimating