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Manufacturing Costs
per Capital Investment
Dr. K. Shahzad Baig
Memorial University of Newfoundland (MUN) Canada
Manufacturing Costs
Manufacturing costs are divided into three classifications as follows:
(1)Variable production costs,
(2) Fixed charges, and
(3) Plant-overhead
This type of cost involves expenditures for raw materials (including transportation,
unloading, etc.,); direct operating labor; supervisory and clerical labor directly connected
with the manufacturing operation; plant maintenance and repairs; operating supplies; power;
utilities; royalties; and catalysts.
Fixed charges remain practically constant from year to year and do not vary widely with
changes in production rate. Depreciation, property taxes, insurance, and rent.
Overhead costs are for hospital and medical services; general plant maintenance, safety
services; payroll overhead including pensions, vacation allowances, social security, and
life insurance; packaging, recreation facilities, salvage services, warehouse and storage
facilities, and special employee benefits.
Direct Production Cost
Raw Materials
Freight or transportation charges should be included in the raw material costs
The ratio of the cost of raw materials to total plant cost obviously will vary considerably
for different types of plants. In chemical plants, raw-material costs are usually in the range
of 10 to 60 percent of the total product cost.
Operating labor
Operating labor may be divided into skilled and unskilled labor. For chemical processes,
operating labor usually amounts to about 10-20 percent of the total product cost.
The relationship between labor requirements and production rate is not always a linear,
therefore, 0.2 to 0.25 power of the capacity ratio when plant capacities are scaled up or
down is often used.
As a rule of thumb,? the labor requirements:
for a fluids-processing plant, such as an ethylene oxide plant would be in the low range of
5 to 2 employee-hours per ton of product;
for a solid-fluids plant, such as a polyethylene plant, the labor requirement would be in
the intermediate range of 2 to 4 employee-hours per ton of product;
for plants primarily engaged in solids processing such as a coal briquetting plant, the large
amount of materials handling would make the labor requirements considerabIy higher
than for other types of plants with a range of 4 to 8 employee-hours per ton of product
being reasonable.
The cost for direct supervisory and clerical labor averages about 15 percent of the cost for
operating labor.
Problem statement
Estimation of labor requirements. Consider a highly automated processing plant having a
capacity of 100 tons/day of product and requiring principal processing steps of heat
transfer, reaction, and distillation. What are the average operating labor requirements for
an annual operation of 300 days?
Solution.
The process plant is considered to require 3 process steps.
From Fig. 6-8, for a capacity of 100 tons product/day, the highly automated process plant
r requires 33 employee-hours/day/processing step.
Thus, for 300 days annual operation, operating labor required =
= (3 X 33 X 300) = 29,700 employee-hours/year
Utilities
The cost for utilities, such as steam, electricity, process and cooling water, compressed
air, natural gas, and fuel oil, varies widely depending on the amount of consumption,
plant location, and source.
Steam requirements include the amount consumed in the manufacturing process plus that
necessary for auxiliary needs. An allowance for radiation and line losses must also be
made.
Electrical power must be supplied for lighting, motors, and various process-equipment
demands. These direct-power requirements should be increased by a factor of 1.1 to 1.25
to allow for line losses and contingencies.
As a rough approximation, utility costs for ordinary chemical processes amount to 10 to
20 percent of the total product cost.
Maintenance and Repairs
Annual costs for equipment maintenance and repairs may range from as low as 2-20
percent of the equipment cost.
In the process industries, the total plant cost per year for maintenance and repairs is
roughly equal to an average of 6 percent of the fixed-capital investment.
For operating rates less than plant capacity, the maintenance and repair cost is generally
estimated as 85 percent of that at 100 percent capacity for a 75 percent operating rate,
and 75 percent of that at 100 percent capacity for a 50 percent operating rate.
Operating Supplies
Many miscellaneous supplies are needed such as charts, lubricants, test chemicals,
custodial supplies etc.
The annual cost for this type of supplies is about 15 percent of the total cost for
maintenance and repairs.
Laboratory Charges
The cost of laboratory tests for control of operations and for product-quality is covered in
this manufacturing cost.
For estimates, this is taken as 10 to 20 percent of the operating labor.
Patents and Royalties
Many manufacturing processes are covered by patents, and it may be necessary to pay a
set amount for patent rights or a royalty.
A rough approximation of patent and royalty costs for patented processes is 0 to 6 percent
of the total product cost.
The engineer must use judgement because royalties vary with such factors as the type of
product and the industry.
Catalysts and Solvents
Costs for catalysts and solvents can be significant and depend upon the specific
manufacturing processes chosen.
Fixed Charges
Costs that are invariant with the amount of production are designated as fired costs or
fired charges. These include costs for depreciation, local property taxes, insurance, and
rent..
As a rough approximation, these charges amount to about 10 to 20 percent of the total
product cost.
Financing
A fixed rate of interest is established at the time the capital is borrowed, so it is affixed
cost. It is preferable to list it as a separate expense under the general heading of
management or financing cost.
Annual interest rates amount to 5 to 10 percent of the total value of the borrowed capital.
The annual depreciation rate for machinery and equipment ordinarily is about 10
percent of the fied-capital investment, while buildings are usually depreciated at an
annual rate of about 3 percent of the initial cost.
Depreciation
Equipment, buildings, and other material objects comprising a manufacturing plant
require an initial investment which must be written off as a manufacturing expense. In
order to write off this cost, a decrease in value is assumed to occur throughout the
usual life of the material possessions. This decrease in value is designated as
depreciation.
A method to evaluate depreciation is the :
= (Cost initial- Salvage value)/ total years of useful life
Insurance
Insurance rates depend on the type of process being carried out in the manufacturing
operation and on the extent of available protection facilities. On an annual basis, these
rates amount to about 1 percent of the fixed-capital investment.
Rent
Annual costs for rented land and buildings amount to about 8 to 12 percent of the value
of the rented property.
Local Taxes
The magnitude of local property taxes depends on the particular locality of the plant and
the regional laws. In highly populated areas the taxes are in the range of 2 to 4 percent of
the fixed-capital investment. In less populated areas, local property taxes are about 1 to 2
percent of the fixed-capital investment.
Plant Overhead Costs
The expenditures required for routine plant services are included in plant overhead
costs. Nonmanufacturing machinery, equipment, and buildings are necessary for
many of the general plant services, and the fixed charges and direct costs for these
items are part of the plant-overhead costs.
The plant-overhead cost for chemical plants is about 50 to 70 percent of the total
expense for operating labor, supervision, and maintenance.
Administrative Costs
Salaries and wages for administrators, secretaries, accountants, stenographers,
typists, and similar workers are part of the administrative expenses, along with costs
for office supplies and equipment, outside communications, administrative
buildings, and other overhead items related with administrative activities.
These costs may vary markedly from plant to plant and depend somewhat on
whether the plant under consideration is a new one or an addition to an old plant.
Distribution and Marketing Costs
In this category are salaries, wages, supplies, and other expenses for sales offices; salaries,
commissions, and traveling expenses for salesmen; shipping expenses; cost of containers;
advertising expenses; and technical sales service.
Distribution and marketing costs vary widely for different types of plants depending on
the particular material being produced, other products sold by the company, plant location,
and company policies.
These costs for most chemical plants are in the range of 2 to 20 percent of the total
product cost.
Research and Development Costs
Research and development costs include salaries and wages for all personnel directly
connected with this type of work, fixed and operating expenses for all machinery and
equipment involved, costs for materials and supplies, direct overhead expenses, and
miscellaneous costs.
In the chemical industry, these costs amount to about 2 to 5 percent of every sales dollar.
Contingencies
Unforeseen events, such as strikes, storms, floods, price variations, and other
contingencies, may have an effect on the costs for a manufacturing operation.
This can be accomplished by including a contingency factor equivalent to 1 to 5
percent of the total product cost.
Following books were used in preparation of notes
 Blank, L., Tarquin. A. 2005. Engineering Economy. 6th Edition, McGraw-Hill.
 Eschenbach, T. G. 2003. Engineering Economy”, 2nd Edition, Oxford University Press
 Riggs, J. L., Bedworth, D. D., Randhawa, S. U. 1996. Engineering Economics”, 4th Edition, Tata McGraw-Hill.
 Riggs, J. L., West. T. M. 1986. Essentials of Engineering Economics”, 2nd Edition, McGraw-Hill.
 Peter, M. S., Timmerhaus, K. D. 1991. Plant Design and Economics for Chemical Engineers. 4th Edition, McGraw-Hill.

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Manufacturing Costs

  • 1. Manufacturing Costs per Capital Investment Dr. K. Shahzad Baig Memorial University of Newfoundland (MUN) Canada
  • 2. Manufacturing Costs Manufacturing costs are divided into three classifications as follows: (1)Variable production costs, (2) Fixed charges, and (3) Plant-overhead This type of cost involves expenditures for raw materials (including transportation, unloading, etc.,); direct operating labor; supervisory and clerical labor directly connected with the manufacturing operation; plant maintenance and repairs; operating supplies; power; utilities; royalties; and catalysts. Fixed charges remain practically constant from year to year and do not vary widely with changes in production rate. Depreciation, property taxes, insurance, and rent. Overhead costs are for hospital and medical services; general plant maintenance, safety services; payroll overhead including pensions, vacation allowances, social security, and life insurance; packaging, recreation facilities, salvage services, warehouse and storage facilities, and special employee benefits.
  • 3. Direct Production Cost Raw Materials Freight or transportation charges should be included in the raw material costs The ratio of the cost of raw materials to total plant cost obviously will vary considerably for different types of plants. In chemical plants, raw-material costs are usually in the range of 10 to 60 percent of the total product cost. Operating labor Operating labor may be divided into skilled and unskilled labor. For chemical processes, operating labor usually amounts to about 10-20 percent of the total product cost. The relationship between labor requirements and production rate is not always a linear, therefore, 0.2 to 0.25 power of the capacity ratio when plant capacities are scaled up or down is often used.
  • 4. As a rule of thumb,? the labor requirements: for a fluids-processing plant, such as an ethylene oxide plant would be in the low range of 5 to 2 employee-hours per ton of product; for a solid-fluids plant, such as a polyethylene plant, the labor requirement would be in the intermediate range of 2 to 4 employee-hours per ton of product; for plants primarily engaged in solids processing such as a coal briquetting plant, the large amount of materials handling would make the labor requirements considerabIy higher than for other types of plants with a range of 4 to 8 employee-hours per ton of product being reasonable. The cost for direct supervisory and clerical labor averages about 15 percent of the cost for operating labor.
  • 5.
  • 6. Problem statement Estimation of labor requirements. Consider a highly automated processing plant having a capacity of 100 tons/day of product and requiring principal processing steps of heat transfer, reaction, and distillation. What are the average operating labor requirements for an annual operation of 300 days? Solution. The process plant is considered to require 3 process steps. From Fig. 6-8, for a capacity of 100 tons product/day, the highly automated process plant r requires 33 employee-hours/day/processing step. Thus, for 300 days annual operation, operating labor required = = (3 X 33 X 300) = 29,700 employee-hours/year
  • 7. Utilities The cost for utilities, such as steam, electricity, process and cooling water, compressed air, natural gas, and fuel oil, varies widely depending on the amount of consumption, plant location, and source. Steam requirements include the amount consumed in the manufacturing process plus that necessary for auxiliary needs. An allowance for radiation and line losses must also be made. Electrical power must be supplied for lighting, motors, and various process-equipment demands. These direct-power requirements should be increased by a factor of 1.1 to 1.25 to allow for line losses and contingencies. As a rough approximation, utility costs for ordinary chemical processes amount to 10 to 20 percent of the total product cost.
  • 8. Maintenance and Repairs Annual costs for equipment maintenance and repairs may range from as low as 2-20 percent of the equipment cost. In the process industries, the total plant cost per year for maintenance and repairs is roughly equal to an average of 6 percent of the fixed-capital investment. For operating rates less than plant capacity, the maintenance and repair cost is generally estimated as 85 percent of that at 100 percent capacity for a 75 percent operating rate, and 75 percent of that at 100 percent capacity for a 50 percent operating rate. Operating Supplies Many miscellaneous supplies are needed such as charts, lubricants, test chemicals, custodial supplies etc. The annual cost for this type of supplies is about 15 percent of the total cost for maintenance and repairs.
  • 9. Laboratory Charges The cost of laboratory tests for control of operations and for product-quality is covered in this manufacturing cost. For estimates, this is taken as 10 to 20 percent of the operating labor. Patents and Royalties Many manufacturing processes are covered by patents, and it may be necessary to pay a set amount for patent rights or a royalty. A rough approximation of patent and royalty costs for patented processes is 0 to 6 percent of the total product cost. The engineer must use judgement because royalties vary with such factors as the type of product and the industry. Catalysts and Solvents Costs for catalysts and solvents can be significant and depend upon the specific manufacturing processes chosen.
  • 10. Fixed Charges Costs that are invariant with the amount of production are designated as fired costs or fired charges. These include costs for depreciation, local property taxes, insurance, and rent.. As a rough approximation, these charges amount to about 10 to 20 percent of the total product cost. Financing A fixed rate of interest is established at the time the capital is borrowed, so it is affixed cost. It is preferable to list it as a separate expense under the general heading of management or financing cost. Annual interest rates amount to 5 to 10 percent of the total value of the borrowed capital.
  • 11. The annual depreciation rate for machinery and equipment ordinarily is about 10 percent of the fied-capital investment, while buildings are usually depreciated at an annual rate of about 3 percent of the initial cost. Depreciation Equipment, buildings, and other material objects comprising a manufacturing plant require an initial investment which must be written off as a manufacturing expense. In order to write off this cost, a decrease in value is assumed to occur throughout the usual life of the material possessions. This decrease in value is designated as depreciation. A method to evaluate depreciation is the : = (Cost initial- Salvage value)/ total years of useful life
  • 12. Insurance Insurance rates depend on the type of process being carried out in the manufacturing operation and on the extent of available protection facilities. On an annual basis, these rates amount to about 1 percent of the fixed-capital investment. Rent Annual costs for rented land and buildings amount to about 8 to 12 percent of the value of the rented property. Local Taxes The magnitude of local property taxes depends on the particular locality of the plant and the regional laws. In highly populated areas the taxes are in the range of 2 to 4 percent of the fixed-capital investment. In less populated areas, local property taxes are about 1 to 2 percent of the fixed-capital investment.
  • 13. Plant Overhead Costs The expenditures required for routine plant services are included in plant overhead costs. Nonmanufacturing machinery, equipment, and buildings are necessary for many of the general plant services, and the fixed charges and direct costs for these items are part of the plant-overhead costs. The plant-overhead cost for chemical plants is about 50 to 70 percent of the total expense for operating labor, supervision, and maintenance. Administrative Costs Salaries and wages for administrators, secretaries, accountants, stenographers, typists, and similar workers are part of the administrative expenses, along with costs for office supplies and equipment, outside communications, administrative buildings, and other overhead items related with administrative activities. These costs may vary markedly from plant to plant and depend somewhat on whether the plant under consideration is a new one or an addition to an old plant.
  • 14. Distribution and Marketing Costs In this category are salaries, wages, supplies, and other expenses for sales offices; salaries, commissions, and traveling expenses for salesmen; shipping expenses; cost of containers; advertising expenses; and technical sales service. Distribution and marketing costs vary widely for different types of plants depending on the particular material being produced, other products sold by the company, plant location, and company policies. These costs for most chemical plants are in the range of 2 to 20 percent of the total product cost. Research and Development Costs Research and development costs include salaries and wages for all personnel directly connected with this type of work, fixed and operating expenses for all machinery and equipment involved, costs for materials and supplies, direct overhead expenses, and miscellaneous costs. In the chemical industry, these costs amount to about 2 to 5 percent of every sales dollar.
  • 15. Contingencies Unforeseen events, such as strikes, storms, floods, price variations, and other contingencies, may have an effect on the costs for a manufacturing operation. This can be accomplished by including a contingency factor equivalent to 1 to 5 percent of the total product cost.
  • 16. Following books were used in preparation of notes  Blank, L., Tarquin. A. 2005. Engineering Economy. 6th Edition, McGraw-Hill.  Eschenbach, T. G. 2003. Engineering Economy”, 2nd Edition, Oxford University Press  Riggs, J. L., Bedworth, D. D., Randhawa, S. U. 1996. Engineering Economics”, 4th Edition, Tata McGraw-Hill.  Riggs, J. L., West. T. M. 1986. Essentials of Engineering Economics”, 2nd Edition, McGraw-Hill.  Peter, M. S., Timmerhaus, K. D. 1991. Plant Design and Economics for Chemical Engineers. 4th Edition, McGraw-Hill.