Calculated Estimate is read-only field (automatically calculated) and is the sum of the estimates of workitem's children.
For example if item A has two children B with
Estimate set to 5 and C with
Estimate set to 3, the
Calculated Estimate of item A is 8.
If any of items B or C also had children and their
Calculated Estimate is higher the
Estimate, then in that case the higher value would be taken when calculating the estimate of item A.
For example if item B has
Estimate 5 but its
Calculated Estimate is 6 then the
Calulated Estimate of item A will be 9.
Calculated Estimate is higher then the initial estimate of an item that should warn you that either the initial estimate is wrong or any child item has been estimated wrong.
Usually when you estimate a story or a feature you guess how big it is and set an "initial" estimate. Later when you break down this story/feature to smaller items and have a better idea how big the smaller items are you set more accurate estimates to them. When these new estimates are rolled up automatically for you it is way easier to compare the initial estimate and the calculated one and decide if you could finish the initial story/feature to the end of the iteration or release. It also gives you idea how accurate in estimating you are and helps you improve in that area.
Note: Tasks and items that are in Excluded status group (check Advanced Settings for more information) are not taken in the calculation.