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3. MANUFACTURING COST ESTIMATING

3.1 COSTS ESTIMATES

•Cost estimating attempts to estimate to estimate the value put into a product by each operation.

•Cost estimates are based on historical records of expenses for equipment.

•Costs are made up of a variety of components,

Profit
Selling								Estimated cost
Contingencies
								or cost of
Engineering
								manufacturing
General and administrative								development
Manufacturing charges		overhead						and sales
Indirect labor		costs			Conversion
		(burden)			costs					Price
Indirect materials
							Cost of goods
		Prime
Direct labor							manufactured
		cost
Direct materials

• Estimated variables for a single product/unit. NOTE: yearly estimates are typically made by management.

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CPjob, CPye ar = profit

CSjob, CSyear = sales costs (this can be as much as 50% in some industries)

CCjob, CCyear = contingincies (e.g., insurance)

CEjob, CEye ar = engineering costs (salaries, computers, etc)

CAjob, CAye ar = administration (executive salaries)

CMOjob, CMOyear = manufacturing overhead charges CILjob, CILyear = indirect labor

CIMjob, CIMye ar = indirect materials CDLjob, CDLyear = direct labor CDMjob, CDMyear = direct materials

OHjob = overhead costs PCjob = prime costs

CCjob = conversion costs

COGMjob = cost of goods manufactured

Pjob = selling price

ECjob = estimated cost

• We can write equations for the simple relationships,

OHjob = CILjob + CIMjob + CMOjob

PCjob = CDMjob + CDLjob

COGMjob = PCjob + OHjob

CCjob = COGMjob – CDMjob

ECjob = COGMjob + CAjob + CEjob + CCjob + CSjob

Pjob = ECjob + CPjob

• We can select a profit using market conditions,

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CPjob		=		1	ECjob		very high competition / low risk
				--------
				100
C		=		10	EC
	Pjob			--------		job	low competition
				100
C		=		20	EC		has market cornered
	Pjob			--------
				100		job

• We need to estimate the total time for the job using the process plan.

TOPERATIONi = the estimated time for operation i

Tjob = ∑ TOPERATIONi

• We can then include time to find the various costs. There are many ways to do this - this is one possible way.

Tyear = total productive machine hours in a year (estimated)

C			=	C		Tjob
		Sjob			Syear	-----------
						T
							year
C			=	C		Tjob
	Cjob				Cyear	-----------
						T
								year
						Tjob
CEjob			= CEy ear			-----------
						T
								year
						Tjob
CAjob			= CAy ear			-----------
						T
								year

Note: When jobs are unique and require more/less cost than average, these rates can and should be adjusted. Avoid misestimating as this will lead to economic losses or lost bids.

• Some costs must be specific to materials used. Depending upon suppliers, shipping, handling, etc. these costs will vary widely. If we use a fairly consistent supplier we can use,

		CDM
	=			job
CIMjob		----------------
		CDM		CIMyear
			year

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• We can estimate indirect labor costs using an assumption that most labor types are fairly similar (this is not true but other book keeping problems may encourage this).

C		= C		CDL
						job
	ILjob		ILyear	---------------
				CDL
					ye ar

• For continuous-long running jobs (minimal setups) using the process plan time estimates we are already to estimate the direct labor costs.

PHCOPERATIONi = productive hour costs (found in AMCE section II)

CDLjob = ∑ TOPERATIONi PHCOPERATIONi

• We can estimate direct material costs two ways using the process plan, the AMCE, and quotes from suppliers.

WF = weight of finished part

L1 = % losses due to scrap (rejects)

L2 = % losses due to waste (chips, cutting, runners)

L3 = % inventory losses (theft/spoilage/shrinkage)

Cmaterial = material costs per unit weight

CDM = CmaterialWF( 1 + L1 + L2 + L3)

OR

Wstocki = weight of required stock i

Cstocki = cost per unit stock i

	CDM	=	∑ ( Wstocki Cstocki)
			-------------------------------------------( 1 – L1	– L2)

Note: these equations will have to be reconsidered as various manufacturing processes are used. For example, reground plastic. Reworking costs, inventory costs, scrap dealer pays for cuttings, volume discounts, etc.

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• Jobs may run in small batches and require setups and multiple steps on a machine. We can do a more detailed cost estimate based on operation steps (using section 5 in the AMCE).

n = # of parts in batches

Coperationi = operation costs calculated using equations in AMCE sec.5

C		=	∑	C		n
	DLjob				operationi	--------
						100

Note: these costs are typically given for batches of 100, we can correct using a simple correction. We could also include scrap, etc.

• If operations at a machine contain multiple steps we can develop a more detailed estimate using the information in section 5 of the AMCE. To do this we need to break each operation down to specific steps. Detail is critical with this method.

j = operation j is a sub-step of operationi

Toperationi	Tsetupoperation
	=	----------------------------i + ∑	Tstepj
		n

• We can use a tabular format (based on a process plan) to calculate,

part #

quantity

part name

material

plant

material cost

Op #

machine/

data

operation

setup

operation

lot

hourly

lot

station

source

description

time

time

time

cost

cost

• Consider the example below,