Process planning and cost estimation unit iii

1. ME6005
PROCESS
PLANNING AND
COST
ESTIMATION

2. UNIT III
INTRODUCTION TO COST
ESTIMATION
 Importance of costing and estimation
 Methods of costing-elements of cost estimation
 Types of estimates
 Estimating procedure
 Estimation labor cost, material cost
 Allocation of over head charges
 Calculation of depreciation cost

3. WHAT IS MEAN BY COST ESTIMATION?
WHAT IS MEAN BY COST ESTIMATION?
 Estimation of the expected cost of producing a job
 Executing a manufacturing order before the
actual production is taken up
 Predicting what new products will cost before
they are made

4. DEFINITION
DEFINITION
Costing or cost accounting means classifying,
recording and allocating the appropriate expenditure for
determining the cost of production and achieved by
keeping a continuous record of all the costs involved in
manufacturing

5. REASONS FOR DOING ESTIMATES
REASONS FOR DOING ESTIMATES
 Should the product be produced?
 When a company designs a new product
 To assist management in making an intelligent decision
about producing the product.

6. GENERAL PROCEDURE
GENERAL PROCEDURE
 A cost estimate must be developed for jigs, fixtures,
tools, dies and gauges
 Also, the cost of any capital equipment must be entered
into the estimate
 These figures are usually supplied through quotation by
vendors
 An estimate of this nature will include a vast amount of
details, because if management approves the project, the
estimate now becomes the budget

7. OBJECTIVES (OR) PURPOSE OF
ESTIMATING
OBJECTIVES (OR) PURPOSE OF
ESTIMATING
 To establish the selling price of a product
 To ascertain whether a proposed product can be
manufactured and marketed profitably
 To determine how much must be invested in equipment
 To find whether parts or assemblies can be more cheaply
fabricated or purchased from outside (make or buy decision)
 To determine the most economical process, tooling or material
for making a product

8. FUNCTIONS OF ESTIMATING
FUNCTIONS OF ESTIMATING
 To calculate the cost of new material needed to
manufacture a product
 To find the cost of parts to be purchased from outside
vendors
 To find the cost of equipment, machinery, tools, jigs
and fixtures etc. required to be purchased to make the
product
 To calculate the direct and indirect labour cost
associated with the manufacture of the product, based
upon work study.
 To calculate various overhead charges associated with
the product.

9.  To decide about the profit to be charged, taking into consideration
other manufacturers of same product in the market
 To calculate the selling price of the product
 To maintain records of previous estimating activities of the
company for future references
 To decide the most economical method of making the product
 To submit cost estimates with the competent authority for further
action
FUNCTIONS OF ESTIMATING
FUNCTIONS OF ESTIMATING
Contd.,

10. COMPONENTS OF A COST
ESTIMATE OR JOB ESTIMATE
COMPONENTS OF A COST
ESTIMATE OR JOB ESTIMATE
1. Cost of design
2. Cost of drafting
3. Cost of research and development
4. Cost of raw materials
5. Cost of labour
6. Cost of inspection
7. Cost of tools, jigs and fixtures
8. Overhead cost

11. 1. COST OF DESIGN
1. COST OF DESIGN
 The cost of design of a component or product is
estimated by ascertaining the expected time for the
design of that component
 The estimate design time multiplied by the salary of
designer per unit time gives the estimated cost of
design
 If the design of the component is done by some
outside agency, the total amount paid to outside
agency gives the cost of design.

12. 2. COST OF DRAFTING
2. COST OF DRAFTING
 Once the design of the component is
complete, its drawings have to be prepared
by draftsman
 The expected time to be spent in drawing or
drafting is estimated and is then multiplied by
the standard drafting rate or by the salary of the
draftsman per unit time to get estimated cost of
drafting

13. 3. COST OF RESEARCH AND DEVELOPMENT WORK
3. COST OF RESEARCH AND DEVELOPMENT WORK
 Before taking up the manufacturing of actual
components/parts considerable time and money has to
be spent on research and development
 The research may be theoretical, experimental or
developmental research.
 The cost of R and D can be estimated by considering
various items of expenditure incurred during R and D
work

14. 4. COST OF RAW MATERIAL
4. COST OF RAW MATERIAL
 A list of all the materials used in the manufacture of the
product is made which includes the direct as well as
indirect materials
 The quantity (weight or volume) of all the material
expected to be used in the manufacture of the product
is estimated.
 The allowance for material wastage, spoilage and scarp
are also added for each component/part.

15. 4. COST OF RAW MATERIAL
4. COST OF RAW MATERIAL
Cost of each material is estimated by multiplying
the estimated quantity of each material with its
estimated future price
The estimate of future price of a material is made
keeping in view of present prices and general
trends and variations
Estimated cost of all the materials is added to get
the overall estimated material cost
Contd.,

16. 5. COST OF LABOUR
5. COST OF LABOUR
 The cost of labour involved in the manufacture of a
product is estimated by estimating the labour time
needed to manufacture the product and multiplying it
by cost of labour per hour.
 In order to estimate the labour time expected to be
spent on a job, one must have thorough knowledge of
the various operations to be performed, machines to
be used, sequence of operations, tools to be used and
labour rates

17. 6. COST OF INSPECTION
6. COST OF INSPECTION
 A product being manufactured is inspected at various
stages during its manufacture
 It may be inspection of raw material or in-process
inspection or inspection of finished goods

18. 7. COST AND MAINTENANCE CHARGES OF TOOLS, JIGS
AND FIXTURES
7. COST AND MAINTENANCE CHARGES OF TOOLS, JIGS
AND FIXTURES
 The cost of tools, jigs, fixtures etc., is estimated
considering their present prices, market trend and the
number of times a particular tool can be used during
its life-time.
 The estimated cost divided by the number of jobs it
can make, gives the tool cost per unit produced

19. 8. OVERHEAD COSTS
8. OVERHEAD COSTS
 Overhead or indirect costs are those which are
not incurred specifically for any one order or
product and these can not be charged directly to
a specific order or product
 The overhead costs may be estimated by
referring to the records of overhead costs in
similar items produced in past

20. BASIC STEPS IN COST ESTIMATION
BASIC STEPS IN COST ESTIMATION
1. Make thorough study of cost estimation request to understand it
fully.
2. Make an analysis of the product and prepare a bill of materials.
3. Make separate lists of parts to be purchased from the market and
parts to be manufactured in plant.
4. Determine the cost of parts to be purchased from outside.
5. Estimate the material cost for the parts/components to be
manufactured in plant.

21. BASIC STEPS IN COST ESTIMATION
BASIC STEPS IN COST ESTIMATION
6. Make manufacturing process plan for the parts to be manufactured
in plant.
7. Estimate the machining time for each operation listed in the
manufacturing process plan.
8. Multiply each operation time by the labour wage rate and add them
up to find direct labour cost
9. Add the estimate of step 4, 5, and 8 to get prime cost of
component.
10. Apply overhead costs to get the total cost of the component.
The selling price of the component is estimated by adding profit to
the total cost obtained in step 10.

22. TYPES OF COST ESTIMATES
TYPES OF COST ESTIMATES
(a) Factor Method of Cost Estimation
(b) Material Cost Method of Estimation
(c) Function Method of Cost Estimation
Other types
(i) Product comparison
(ii) Data base calculations

23. FACTOR METHOD OF COST ESTIMATION
FACTOR METHOD OF COST ESTIMATION
Estimated cost of an item = Factor for total cost
estimate × Amount of major cost item
Example:
(i) Cost of construction per km of highway
(ii) Cost of fabricated component per kg of casting
(iii) Cost of house construction per Sq.m. of
livable space

24. Example Problem:
If a casting weighed 15 kg, and the factor of the cost of
casting per kg of casting is Rs. 75, what is the estimated
cost of the casting ?
Estimated cost of the casting = Rs. 75 per kg of casting
× wt. of the casting (15 kg) = Rs. 1125 per casting

25. MATERIAL COST METHOD OF
ESTIMATION
MATERIAL COST METHOD OF
ESTIMATION
Material cost method predicts the total cost of the
product based on the ratio of the material cost of
the product to the material cost share of the total
cost.
Estimated cost of an item
=
Material cost of the item being estimated
Material cost share of item being estimated (in %)

26. Examples of material cost share :
Product Material cost share (%)
Passenger car 65%
Diesel engine 50%
Clocks, watches 25%
Glass product 10%
Example Problem:
If the material cost of an automobile was Rs. 2.50
Lakhs, what would be the total cost of the automobile ?
Use the table above.
Estimated total cost of automobile = Rs. 2.50 Lakhs /
0.65 = Rs. 3.85 Lakhs

27.  This method is similar to the factor method, but
more variables are used.
 Function method uses a mathematical expression
with constants and parameters derived for
specific process, such as casting or machining or
for specific classes of parts based on material,
size, weight or other cost parameters.
Function Method of Estimation
Function Method of Estimation

28. According to this method :
Estimated cost of an item = G × (a + b) + (R × c) + (N × d)
where
G = Weight of the item, kg
a = Material cost per kg
b = Tolerance cost per, kg
R = Weight of material Removed, kg
c = Cost per kg of material removed
N = No. of dimensions of a product surface
d = Cost per dimension
Function Method of Estimation
Function Method of Estimation
Contd.,

29. (i) Product comparison :
The new product is compared with existing
products (of similar function, design etc.) and
adjustments/modifications are made for the differences.
(ii) Data base calculations :
The product cost estimate is determined from cost
data bases which a company is expected to maintain
over a period of time (Historical Cost Data Base).

30. ELEMENTS OF COST
ELEMENTS OF COST
 Material cost
(a) Direct material cost
(b) Indirect material cost
 Labour cost
(a) Direct labour cost
(b) Indirect labour cost
 Other expenses
(a) Direct expenses
(b) Indirect expenses
(i) Factory expenses
(ii) Administrative expenses
(iii) Selling and distribution expenses

31. MATERIAL COST
MATERIAL COST
Direct material cost
(i) From the product drawing, make a list of all the
components required to make the final product.
(ii) Calculate the volume of each component from the
drawing dimensions after adding machining allowances,
wherever necessary.
(iii) The volume of component multiplied by the density
of material used gives the weight of the material per
component.

32. MATERIAL COST
MATERIAL COST
Direct material cost
(iv) Add process rejection and other allowances like
cutting allowance to get the gross weight per
component.
(v) Multiply the gross weight by the cost of material per
unit weight to get the cost of raw material per
component.
(vi) The cost of raw material for all the components is,
similarly, calculated and added up which gives the cost
of direct material for the product.
Contd.,

33. MATERIAL COST
MATERIAL COST
Indirect material cost
 The indirect materials include oils, general tools,
grease, sand papers, coolants, cotton waste etc.
 The cost associated with indirect materials is
called indirect material cost.

34. LABOUR COST
LABOUR COST
Direct labour cost
 Direct labourer is one who actually works and
processes the materials to convert it into the final
shape.
 The cost associated with direct labour is called direct
labour cost.
 The direct labour are the workers operating lathes,
milling machines or welders, or assemblers in
assembly shop.

35. LABOUR COST
LABOUR COST
Indirect labour cost
 Indirect labourer is one who is not directly employed
in the manufacturing of the product but his services
are used in some indirect manner.
 The cost associated with indirect labour is called
indirect labour cost.
 The indirect labour includes supervisors, inspectors,
foreman, storekeeper, gatekeeper, maintenance staff,
crane driver etc.

36. OTHER EXPENSES
OTHER EXPENSES
Direct expenses
 Direct expenses include all that expenditure which can
be directly allocated and charged to a particular job.
 The direct expenses include cost of special jigs or
fixtures, patterns, toolings made for job, or cost of
research and development work done for that specific
job.

37. OTHER EXPENSES
OTHER EXPENSES
Indirect expenses
 Except direct expenses, all other indirect expenditure
incurred by the manufacturer is called indirect
expenses
 The indirect expenses are also called overhead
expenses or on-cost
The indirect expenses are further classified as
(i) Factory expenses
(ii) Administrative expenses
(iii) Selling and distribution expenses

38. OTHER EXPENSES
OTHER EXPENSES
Indirect expenses - Factory expenses
 Factory expenses comprise of the indirect
expenses incurred from the receipt of the order
to the completion of production.
 Includes rent of factory building, licence fee,
electricity and telephone bills of factory,
insurance charges etc.

39. OTHER EXPENSES
OTHER EXPENSES
Indirect expenses - Administrative expenses
 Administrative expenses or office expenses
include the expenditure incurred on control and
administration of the factory
 It includes the salaries of office and
administrative staff, rent of office building,
postage and telephone charges, water and
electricity charges for office, Director’s fee, legal
and audit charges etc.

40. OTHER EXPENSES
OTHER EXPENSES
Indirect expenses - Selling and distribution
expenses
 his is the expenditure incurred on Sales
Department for selling the product
 It includes the wages, salaries, commission and
travelling allowances of salesmen and officers in
Sales Department, cost of advertisement,
packing, delivery and distribution expenses, rent
of warehouses etc.

41. METHODS OF ESTIMATING
METHODS OF ESTIMATING
 Conference method
 Comparison method
 Detailed analysis method

42. CONFERENCE METHOD
CONFERENCE METHOD
 A co-ordinator from either accounting or
estimating collect costs and applies overhead
factors to develop a total manufacturing cost for
the product
 If vague or only verbal information is available,
then the total product material, labour and tooling
will be estimated as one lump sum for each
 The degree of accuracy of this method depends
upon the availability of specificaitions, samples
and drawings

43. COMPARISON METHOD
COMPARISON METHOD
 In this method of estimating the costs of similar
parts are applied to the product and are adjusted to
suit variations in the workpiece, material and
labour costs.
 It is based on the accumulation of past experience
data

44. DETAILED ANALYSIS METHOD
DETAILED ANALYSIS METHOD
This method involves
I. Calculation of raw material usage including scrap
allowance and salvage material
II. Processing each individual component (writing the
operation sheet)
III. Determining the production time (direct labour) for each
operation
IV. The equipment required (new, network, or on hand)
V. Tools, gauges, and special fixtures or dies,
VI. Inspection and testing equipment
VII. Packaging and shipping requirements

45. COST ESTIMATING PROCEDURE
COST ESTIMATING PROCEDURE
Step 1: Study the cost estimation request thoroughly
and understand it completely
Step 2: Analyse the product and decide the
requirements and specifications of the product
Step 3: Prepare the list of all the parts of the product
and their bill of materials
Step 4: Take make or buy decisions and prepare
separate lists of parts to be manufactured within the
plant and parts to be purchased outside the plant

46. COST ESTIMATING PROCEDURE
COST ESTIMATING PROCEDURE
Step 5: Estimate the materials cost for the parts to be manufactured in
the plant
Material cost =
Weight of the
material
×
Material cost per
unit weight
Step 6 : Determine the cost of parts to be purchased from outside
Step 7: Make a manufacturing process plan for the parts to be
manufactured in the plant
Contd.,

47. COST ESTIMATING PROCEDURE
COST ESTIMATING PROCEDURE
Step 8: Estimate the machining time for each operations listed in
the manufacturing process plan
Step 9: Determine the direct labour cost
Direct labour cost =
Total operation
time
×
Labour
wage rate
Step 10: Determine the prime cost by adding direct expenses,
direct material cost, and direct labour cost
∴ Prime cost =
Direct
labour
cost
+
Direct
material cost
+
Direct
expenses
Contd.,

48. COST ESTIMATING PROCEDURE
COST ESTIMATING PROCEDURE
Step 11: Estimate the factory overheads, which include all
indirect expenditure incurred during production such as
indirect material cost, indirect labour cost, depreciation and
expenditure on maintenance of the plant, machinery, power,
etc.
Step 12: Estimate the administrative expenses
Contd.,

49. COST ESTIMATING PROCEDURE
COST ESTIMATING PROCEDURE
Step 13: Estimate the selling and distribution expenses
which include packing and delivery charges, advertisement
charges, etc.
Step 14: Now calculate the total cost of the product
Total Cost
=
Prime
Cost
+
Factory
overheads
+
Administrative
expenses
+
Selling and
distribution expenses
Contd.,

50. COST ESTIMATING PROCEDURE
COST ESTIMATING PROCEDURE
Step 15: Decide the profit and add the profit to the total cost
to fix the selling price of the part
Selling Price = Total cost + Profit
Step 16: Finally estimate the time of delivery in
consultation with the production and sales department
Contd.,

51. ESTIMATE FORM
ESTIMATE FORM
After estimating all the
elements of cost
estimate, these estimated
datas are entered into an
estimate form

52. COST OF PRODUCT
(LADDER OF COSTS)
COST OF PRODUCT
(LADDER OF COSTS)
1. Prime cost = Direct material cost + Direct
labour cost + Direct expenses
2. Factory cost = Prime cost + Factory expenses
3. Production cost = Factory cost + Administrative
expenses
4. Total or Ultimate cost = Production cost +
Selling and distribution expenses.
5. Selling price = Ultimate cost + Profit

53. BLOCK DIAGRAM
BLOCK DIAGRAM

54. Example: Calculate prime cost, factory cost, production cost, total cost and
selling price per item from the data given below for the year 2003-04.

57. Example : From the following data for a sewing machine manufacturer,
prepare a statement showing prime cost, Works/factory cost, production cost,
total cost and profit.

60. Example : From the following data for a sewing machine manufacturer,
prepare a statement showing prime cost, Works/factory cost, production cost,
total cost and profit.

70. ESTIMATION OF MATERIALS COST
ESTIMATION OF MATERIALS COST
Procedure
 Study the given drawing carefully. Then break up
the product into simple geometrical shapes such as
cubes, prisms, cylinders, etc.,
 Calculate the volume of each parts using formulae
 Add volumes to get total volume
 Calculate the weight of material by Volume ×
Density
 Material cost =
Weight of the
material
×
Material cost per
unit weight

71. Example