1. The art of costing
Tiago Lopes, Industrial Engineer/Executive MBA, May 2014
A personal view into tools and
methodologies

2. Warning! Cost ≠ Price ≠ Value
2
Price
Value
Cost
• Commercial arrangement
• Premiums from
innovation, availability
• Target RFQ
• Strategy
• Form, Fit and Function
• Quality, Delivery, Convenience,
Performance, etc.
• Extrinsic and emergent
• Materials, Labor,
Manufacturing, etc.
• Calculated reference for
negotiations, continuous
improvement
• Internal and actionable

3. The schematic of cost composition
(and selling price)
Direct Labor
Direct
Material
Investment
Costs
Direct Cost
Production
Costs
Processing
Costs
Operation
Costs
Organization
costs
Total Cost
Profit
Selling Price
The compounding of costs should be enough to sell a product with a reasonable profit
margin. By understanding and controlling these items, a business can be managed through
a thought competitive environment to success.
Costing would be the action of identifying all the
resources required to produce a product/service
translated into an economic amount

4. Direct Material
Direct materials cost is the cost of direct
materials which can be easily identified with
the unit of production - From Wikipedia, the free encyclopedia
To produce a certain product, materials are needed in a defined
quantity and according to a specification.
This would also include the transportation of the materials to the
production site and related packaging.
This quantification will be translated into the material costs.

5. Direct Labor
Direct labor cost is a part of wage-bill or payroll
that can be specifically and consistently
assigned to or associated with the manufacture
of a product, a particular work order, or
provision of a service
My personal twist, is about the evolving world
we live in. In a world were product can be as
sophisticated as vaccines or software, PhD's are
producing output. Other examples could be
production made in robotized production lines…
No worries, for every setting there is a model to
apply!
- From Wikipedia, the free encyclopedia

6. Processing Costs
Processing costs are the costs incurred by
the utilized technology found at each
process or stage of manufacture, which will
contribute to the overall cost of a product.
These would be the costs of the energy utilized, the maintenance
required, waste management, specific spending in process enables
such as oils, cooling liquids, etc.
I would also include costs as indirect labor (supervision), internal
logistics and other overheads

7. Investment Costs
Investment costs will be the portion of the
overall investment required translated into a
cost that can be related to the product being
manufactured.
To produce a certain good, machines, equipment, installations,
patents, etc. are needed. How to make a wise repartition of that
initial investment is what is all about…
There are rules according to tax laws but we have to understand
the implications of the choices available to take the best decision.

8. Organization costs
Organization costs will be the costs from
the organization not covered by a specific
product/service.
It would be costs such as generic R&D, Sales, Marketing,
Administration, etc. This type of cost is normally denominated as
SG&A (Selling, General & Administrative Expense) but I would like
to capture some other costs that are indirect to production and
need to be covered.
It could also be the cost of the financing required, if a third entity
is making the cash resources available against an expectation of
scheduled repayments.

9. Profit
Profit is what a venture gains in its realization
and it should be considered as an incentive to
cover the risk cause by the application of the
resources. Only by having some profit will
stakeholders make the decision go ahead
with a certain project.
There are also organizations that do not consider profit as their
goal but profit should be gathered during the good years to
cover for the bad ones – as such, its wise application is essential
to grow or to survive

10. Conclusions
Dear readers,
For this first presentation I wanted to make a quick tour,
not loosing myself in details…
In the next presentations I shall go deeper on what I
consider relevant to share, trying to avoid «clichés» and
repetitions of self-proclaimed gurus.
I count on your feedback to help me achieve that!
Thanks in advance!

11. Who am I?
• I’m an Industrial Engineer and exec. MBA
• Experienced in
– Management: Plant Management, Business management,
Project Management, VA/VE and other special projects
– Operations: Supply chain, Industrial footpath & Green field
operations, Lean process installation & Ergonomics, Lean 6
Sigma continuous improvement
– Finance: P&L, Cost calculation, Price target strategies
– International footpath,
– Passionate for sci-fi and strategy