Cost and Economic Analysis Flashcards

In DoD economic analysis, 'constant-year dollars' are used primarily to:

Answer: Remove the effects of inflation so costs can be compared across years

Constant-year dollars adjust all costs to a single base year's purchasing power, eliminating inflation effects and enabling valid year-to-year cost comparisons.

A contractor's overhead rate is 120% applied to direct labor. If direct labor is $500,000, what is the total overhead charge?

Answer: $600,000

$500,000 × 1.20 = $600,000 in overhead, which when added to direct labor gives a total burdened cost of $1,100,000.

Which document establishes the analytical framework and ground rules for conducting a DoD economic analysis supporting a major investment decision?

Answer: Analysis of Alternatives (AoA) Study Plan

The AoA Study Plan defines the scope, methodology, ground rules, and assumptions that govern the economic comparison of system alternatives.

Learning curve theory predicts that as cumulative production doubles, unit costs decrease by a fixed percentage. A 90% learning curve on a $1,000 first-unit cost means the second unit costs:

Answer: $900

A 90% learning curve means cumulative average cost is 90% of the prior level each time output doubles; the second unit's average is $900.

The primary difference between a cost-effectiveness analysis and a cost-benefit analysis in a defense context is:

Answer: Cost-benefit monetizes all benefits; cost-effectiveness measures outcomes in non-monetary units

Cost-effectiveness compares alternatives by cost per unit of outcome (e.g., cost per target killed) without monetizing benefits, while cost-benefit converts all outcomes to dollars.

Risk-adjusted cost estimates in DoD programs typically add cost reserves based on:

Answer: Probabilistic analysis of cost driver uncertainties (e.g., Monte Carlo simulation)

Monte Carlo simulation and other probabilistic methods quantify cost risk by sampling distributions of uncertain inputs to generate a range of possible outcomes.

A program's total ownership cost (TOC) includes all of the following EXCEPT:

Answer: Competitor program development costs

TOC covers all costs the government incurs for a specific program across its life cycle; costs incurred by competing programs are not part of that program's TOC.