ME8793 Process Planning and Cost EStimation UNIT 3 QB
ME8793 Process Planning and Cost EStimation UNIT 3 QB
com
ME8793/Process Planning & Cost Estimation Year/sem:IV/VII
1. )
Relaxation Allowance
Fatigue allowance
Personal need allowance
Process allowance
Interference allowance
Contingency allowance
Special allowance
2. (AU N/D
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Batch costing.
Hybrid costing systems.
14. List the various elements of cost. (AU M/J 16) )
Material cost,
Labour cost and
Other expenses
15. What shall be the effect of overestimate
If a job is over estimated, i.e the estimated cost is much more than the actual
cost of the product, then the firm will not be able to compete with its competitors who
estimated the price correctly and losses the order to its competitors.
16. (AU M/J
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20.
The efficiency of the worker decreases due to fatigue (or) working at a stretch
and also due to working conditions such as poor lighting, heating (or) ventilation. The
efficiency is also affected by the psychology of the worker. It may be due to domestic
worries, job securities etc. For normal work, the allowance for fatigue is about 5% of
the total time. This allowance can be increased depending upon the type and nature of
work and working conditions.
21. (AU N/D
Methods of Costing
(a) Process costing.
(b) Job costing.
(c) Batch costing.
(d) Hybrid costing systems.
(a) Process costing
This method is employed when a standard product is being made which involves a
number of distinct processes performed in a definite sequence.
In oil refining, chemical manufacture, paper making, flour milling, and cement
manufacturing etc., this method is used.
The object i.e., record and trace cots for each distinct stage.
While costing, the by-products of each process should be considered.
This method indicates the cost of a product at different stages as it passes
through various processes.
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The total time spent and materials used on each process, as well as services
such as power, light and heating are all charged. For this purpose cost sheet
may be employed.
The process cost sheet is a summary of all operations for the month. The current
operating charges are entered on the sheet showing
1. The transfer cost from the previous operation.
2. The costs incurred by each operation showing materials, labour and overhead in
separate columns.
This separation of transfer cost and conversion cost is extremely important for the
charges incurred by a department are its measures of efficiency.
The sheet can be used as a basis for:
1. Closing entries at the end of each month.
2. Operating statements, without need to look up the ledger accounts.
Within the cost ledger an account is kept for each process. The direct material,
direct labour and factory overhead costs are transferred from the process cost sheet.
There are debited to the process account, and then any completed units are credited to
cover the transfer to the next process. The balance on the account represents the work-
in-progress at the end of the period, which, of course, becomes the opening balance
for the next period.
A record of above costs per unit time is kept in separate cost sheets.
Batch costing is a form of job costing. Instead of costing each component separately,
each batch of components are taken together and treated as a job.
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Besides maintaining job cost sheets it may also be necessary to keep summary
sheets on which the cost of each component can be transferred and the cost of the
finished product can be calculated. This applies in general engineering where many
hundreds of components may go towards making the finished machine or other
product.
2. Explain the procedure followed for estimating the cost of an individual product.
(8 marks)
The basic steps in the cost estimation of any product are given below:
Make thorough study of cost estimation request to understand it fully.
Make an analysis of the product and prepare a bill of materials.
Make separate lists of parts to be purchased from the market and parts to be
manufactured in plant.
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Elements of cost
For the purpose of calculations, the total cost of the product is divided into the following:
(A) Material cost, (B) Labour cost, (C) Other expenses.
(A) Material Cost
Material cost consists of the cost of materials which are used in the manufacture of
product. It is divided into the following
(a) Direct material cost: It is the cost of those materials which are directly used for the
manufacture of the product and become a part of the finished product. This expenditure
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can be directly allocated and charged to the manufacture of a specific product or job and
includes the scrap and waste that has been cut away from original bar or casting. The
procedure for calculating the direct material cost is as follows:
(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, where ever necessary.
(iii) The volume of component multiplied by the density of material used gives the
weight of the material per component.
(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.
(b) Indirect material cost: In addition to direct materials a number of other materials are
necessary to help in the conversion of direct materials into final shape. Though these
materials
product and their cost cannot be directly booked to the manufacture of a specific product.
Such materials are called indirect materials. 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.
In some cases certain direct materials like nails, screws, glue, putty etc., are used in
such small quantity that it is not considered worthwhile to identify and charge them as
direct materials. In such cases these materials are also charged as indirect materials.
Depending upon the product manufactured, the same may be direct materials for one
concern and indirect materials for others.
It is the expenditure made on the salaries, wages, overtime, bonuses, etc. of the
employees of the enterprise. It can be classified as :
(a) 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 cost can be identified and allocated to the
manufacture of a specific product. Examples of the direct labour are the workers
operating lathes, milling machines or welders, or assemblers in assembly shop. The direct
labour cost may be allocated to a product or job on the basis of time spent by a worker on
a job.
(b) 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
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To make the concept of direct and indirect labour cost clear, consider an operator working
on a drilling machine. The operator in this case is direct labour whereas the man
supervising the job, inspector and store man supplying the material are indirect labour.
In addition to the material cost and labour cost, several other expenses such as rent of
building, depreciation of plant and machinery, cost of packing materials, transport and
distribution expenses, wages and salaries of administrative staff and executives are also
incurred by the manufacturer. All this expenditure including the indirect material cost and
indirect labour cost is called other expenses. We can say that except direct material and
her
(a) 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, tooling made for job, or cost of research and development work done
for that specific job.
(b) 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:
Factory expenses.
Administrative expenses.
Selling and distribution expenses.
(i) Factory expenses: Factory expenses comprise of the indirect expenses incurred
from the receipt of the order to the completion of production. In addition to indirect
material and indirect labour cost it includes rent of factory building, licence fee,
electricity and telephone bills of factory, insurance charges etc. Factory expenses are
also
(c) Selling and distribution expenses: This is the expenditure incurred on Sales
Department for selling the product, i.e., wages, salaries, commission and travelling
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Budgetary
The budgetary estimate can also be a guesstimate but is used for a different
purpose. The budgetary estimate is used for planning the cost of a piece part,
assembly, or project. This type of estimate is typically on the high side because the
estimator understands that a low estimate could create real problems.
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speeds, feeds, cutting times, load and unload times and even machine manipulations
factors. These time values are calculated as standard time and adjusted with an
efficiency factor to predict actual performance.
Parametric Estimating
Parametric estimating is an estimating method developed and used by trade
associations. New housing constructions can be estimated on the basis of cost per
square. There would be different figures for wood construction as compared with
brick and for single strong construction as compared with multilevel construction.
Some heat-beating companies price work on a cost per pound basis and have different
cost curves for different heat-treating methods.
Project Estimating
Project estimating is by far the most complex of all estimating tasks. This is
especially true if the project is a lengthy one. A good example of project estimating is
the time and cost of developing a new missile. The project might take 5 years and cost
millions of dollars. The actual manufacturing cost of the missile might be a fraction of
the total cost. Major projects of this nature will have a PERT network to keep track of
the many complexities of the project. A team of people with a project leader is usually
required to develop a project estimate.
1. Man-hour cost (Labour rate) i.e., hourly cost of skilled, semi-skilled and unskilled
labours of the company.
2. Machine-hour cost for different types of equipment and machinery available in the
company.
3. Material cost in respect of commercially available materials in the market :
Cost in Rs. per kg for different categories of materials like ferrous, non-
ferrous, special steel etc., for rods of different diameters and for different
thicknesses in respect of flats/sheet metals.
4. Scarp rates i.e., scarp values of different materials in Rs. per kg.
5. In respect of welding operations, information such as electrode cost, gas cost, flux
cost, power cost, etc.
6. Set-up time for different processes.
7. % allowances to be added for computing standard time, relaxation allowance,
process allowance, special allowance as % of normal time as per the policy of the
management.
8. Standard time for different types of jobs, if available.
9. Overhead charges in terms of % direct labour cost or overhead rate in Rs. per hr.
10. Life in years permitted for various types of equipment and machines available in
the plant for calculation of depreciation, for cost recovery and for calculation of
machine hour rate.
11. Data base of cost calculations carried out by the company in respect of earlier
products or jobs (Historical cost data).
12. Cost data of products available in the market similar to the ones manufactured by
the company.
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Group Technology
Group technology is not new. It was invented by a Russian engineer over 30
years ago. Unfortunately the subject is not taught in many of our colleges and
universities. Group technology (GT) is a coding system to describe something.
Several proprietary systems are on the market. One such system, the MICAPP system,
uses four code lengths, a 10-, 15-, 20-, 25- digit code. The code length selected is
based on the complexity of the piece part or tool being described.
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Some construction companies have refined this process to provide additional detail
carpeting, for example, could have a separate multiplier.
Heat treating
Most commercial heat-treating companies price their work based on a cost per
pound and heat treating method. Heat-treating costs are very difficult to define
because many times more than one type of part is in the heat-treating furnace at the
same time. It is difficult to think of a more effective way to estimate cost for this type
of industry.
Statistical Estimating
The analysis of data through the use of statistical methods has been used for
centuries. These data can be cost versus other information that leads to cost
development. The practitioner must have a well-founded background in the use and
application of statistical methods because an endless array of methods is available,
several of which are described below.
Parametric estimating
Statistical estimating is another form of parametric estimating. The parametric
methods made industry oriented whereas the methods discussed below are universal.
Regression analysis
They form most popular of regression analysis are simple regression, multiple
regression, log-linear regression and curvilinear regression. Each math model is
different and is designed for a specific use.
Allowances in estimation
Normal Time = Observed time × Rating factor
Observed time and rating factor are obtained during the time study of an
operation or a job.
Various allowances are considered in estimating the standard time for a job.
These allowances are always expressed as % of Normal Time and are added to
Normal Time to compute the Standard Time.
Standard Time = Normal Time + Allowances
Standard Time is time required to complete one cycle of operation (usually
expressed in minutes).
Standard Time for a job is the basis for determining the standard output of the
operator in one day or shift.
Need for Allowances
Any operator will not be able to carry out his work throughout the day without
any interruptions. The operator requires some time for his personal needs and rest,
and hence such time should be included in standard time. There are different types of
allowances, and they can be classified as follows :
1. Relaxation Allowance : This is also known as Rest Allowance. This allowance is
given to enable the operator to recover from the physiological and psychological
effects (Fatigue) of carrying out the specified work and to attend to personal needs.
Relaxation allowance consists of :
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Points of
Cost estimating Cost accounting
comparison
1.Types of It gives an expected cost of the It gives actual cost of the product
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cost product based on the based on the data collected from the
calculations by means of different expenditures actually done
standard formula. for a product.
It is generally carried out before It usually starts with the issue of order
actual production of a product for production of a product and ends
Due to certain unexpected after the product is dispatched for
expenses coming to light at a sale. For sale commitments like free
2.Duration later stage, estimates may be repair or replacement, the process
of process modified or revised. continuous up to the expiry period of
guarantee because the overhead
expenses incurred in the above case
will be included in the production
cost.
10. What are the methods used in conceptual cost estimation? Explain (8 marks)
There are different methods of estimates of cost. These are in addition to conventional
method of estimating of cost such as calculating material cost, labour cost, factory
expenses and overhead expenses and adding all these cost elements.
The methods of estimates are :
1. Conceptual Cost Estimating
It is estimating during the conceptual design stage. In the conceptual design
stage, the geometry of parts and materials have not been specified, unless they dictate
essential product functions. In the conceptual design stage, the costs associated with a
change in the design are low. In the conceptual design stage, the incurred costs are
only 5 to 7% of the total cost whereas the committed costs are 75 to 85% of the total
cost.
The accuracy of the conceptual cost estimate depends on the accuracy of the
data base. The accuracy of conceptual cost estimating is approximately 30% to +
50%. Accuracy in conceptual cost estimating is important since at the conceptual
design stage only significant cost savings can occur.
Conceptual cost estimating methods include :
(a) Expert opinion,
(b) Analogy methods, and
(c) Formula based methods.
(a) Conceptual Method Based on Expert Opinion
If back-up and/or historical cost data are not available, getting expert opinion
is the only way for estimating cost.
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1. Prime cost: It consists of direct material cost, direct labour cost and direct expenses.
Prime cost = Direct material cost + Direct labour cost + Direct expenses.
Prime cost is also called as direct cost.
2. Factory cost: It consists of prime cost and factory expenses.
Factory cost = prime cost + factory expenses.
Factory cost is also named as works cost.
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Selling price
If the profit is added in the total cost of the product, it is called selling price. The
customers get the
articles by paying the price which is named as selling price.
Selling price = Total cost + Profit
= Total cost Loss
Making price (or) catalogue price: Some percentage of discount allowed to the
distributors of product is added into the selling price. The result obtained is called the
market price (or) catalogue price (figure).
13. Explain the various methods used in an industry for allocation of overheads with
an example. (16 marks) )
After estimating the total on-cost, next step is the allocation of this on-cost over the
production. To run the business in economical way, it is necessary to know, the
variation of on-cost with the variation of production. Several methods are available
for the allocation of on-cost. The choice of a particular method depends upon the
nature of work, type of organisation and types of machine used, etc.
Following are the different methods of on-cost allocation:
Percentage on direct material cost.
Percentage on direct labour cost.
Percentage on prime cost.
Manhour method.
Machine hour method.
Combination of man hour and machine hour method.
Unit of production method.
Space rate method.
These methods for estimation the overheads are discussed below:
Percentage on Direct Material Cost
This method is based on the theory that the overhead expense is incurred in
proportion to the value of the direct materials consumed. This method is simple, but
does not allow for the usual situation where in some of the materials is fabricated
without the use of much equipment whereas other material in the same plant requires
extensive machinery, requiring considerably more labour, power, maintenance and
floor space.
However, for the allocation of material expenses such as purchasing, storage
and handling, this method is useful. This method is also useful when major part of the
cost is of material line foundries and mines.
Overhead rate =
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Man-Hour Rate
This method is very similar to the percentage on direct labour cost method.
The difference in the two methods is that in which the basis of allocation was the total
direct labour cost, whereas in this basis of the total hours spent by the direct labour
and not the wages paid to them. This is an important method over the direct labour
cost method.
Man-hour rate =
Unit Rate Method
This is also known as production unit basis method. In this, on-cost is
allocated on the basis of unit of production. Unit of production is generally piece,
kilogram, tonne, litres, metre, etc. This method is mostly used where only one type of
production is carried out. This method cannot be used in factories, where different
kinds of products are manufactured. Unit rate is the overheads for one unit. It can be
calculated as the ratio of total overheads to the quantity of production during a
particular period.
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Overhead/Unit =
Space Rate Method
The amount of space occupied by a machine has a relationship to certain
overhead expenses. For example, building expense, heat, light, ventilation and service
equipment such as cranes and conveyors
Space rate/m2 for a department is
Rs. =
Space charges to the individual machine for the defined period of time = Space rate
× Total area with which the machine should be charged.
14. A factory has 15 lathes of same make and capacity and 5 shapers of same make
and capacity. Lathes occupy 30 m2 area while shapers occupy 15 m2. During one
calender year, factory expenses for this section area are as follows:
(i) Building rent and depreciation Rs. 5000
(ii) Indirect labour and material Rs. 15000
(iii) Insurance Rs. 2000
(iv) Depreciation charges of lathes Rs. 5000
(v) Depreciation charges of shapers Rs. 3000
(vi) Power consumption for the lathes Rs. 2000
(vii) Power consumption for the shapers Rs. 1000
Find out the machine hour rate for lathes and shapers work for 25000 hours and
8000 hours respectively. (16 marks) (AU A/M 8)
Solution
(a) Lathe section
Total overheads for the lathe section will be as follows:
(i) Building rent and depreciation (charged on the basis of floor area occupied)
= (5000 × 30) / (30 + 15)
= Rs. 3333.33
(ii) Indirect labour and material = (15000 × 30) / (30 + 15)
= Rs.10000
(iii) Insurance = (2000 × 30) / (30 + 15)
= Rs. 1333.33
(iv) Depreciation = Rs. 5000
(v) Power = Rs. 2000
Total overheads = Rs. 21666.66
Machine hour rate for lathes = 21666.66 / 25000
= Rs. 0.87
(b) Shaper section
Total overhead for the shaper section will be as follows
(i) Building rent and depreciation = (5000 ×15) / (30+15)
= Rs. 1666.66
(ii) Indirect labour and material = (15000×15) / (30+15)
= Rs.5000
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16. From the following data for a sewing machine manufacturer, prepare a
statement showing prime cost, Works/factory cost, production cost, total cost
and profit.
Rs.
Value of stock of material as on 1-04-2003 26,000
Material purchased 2,74,000
Wages to labour 1,20,000
Depreciation of plant and machinery 8,000
Depreciation of office equipment 2,000
Rent, taxes and insurance of factory 16,000
General administrative expenses 3,400
Water, power and telephone bills of factory 9,600
Water, lighting and telephone bills of office 2,500
Material transportation in factory 2,000
Insurance and rent of office building 2,000
Direct expenses 5,000
Commission and pay of salesman 10,500
Repair and maintenance of plant 1,000
Works Manager salary 30,000
Salary of office staff 60,000
Value of stock of material as on 31-03-2004 36,000
Sale of products 6,36,000
(16 marks)
Solution :
(i) Material cost = Opening stock value + Material purchases Closing balance
= 26,000 + 2,74,000 36,000
= Rs. 2,64,000
Prime cost = Direct material cost + Direct labour cost + Direct expenses
= 2,64,000 + 1,20,000 + 5,000
= Rs. 3,89,000
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17. In a manual operation, observed time for a cycle of operation is 0.5 minute and
the rating factor as observed by the time study engineer is 125%. All allowances
put together is 15% of N.T. (Normal Time). Estimate the Standard Time.
(8marks) (
Solution :
Observed time for a cycle = 0.5 min.
Rating factor = 125%
Normal time = Observed time × Rating factor
= 0.5 × 1.25
= 0.625 min.
Allowances = 15% of Normal Time
Standard Time = Normal Time + Allowances
= 0.625 min. + (0.15 × 0.625) min.
= 0.625 min. + 0.094 min.
= 0.719 min.
= 0.72 min.
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18. In a manufacturing process, the observed time for 1 cycle of operation is 0.75
min. The rating factor is 110%. The following are the various allowances as % of
normal time :
Personal allowance = 3%
Relaxation allowance = 10%
Delay allowance = 2%
Estimate the standard time. (8 marks)
Solution :
Basic time or normal time = Observed time × Rating factor
= 0.75 min × 110%
= 0.75 × 1.1
= 0.825 min.
Standard time = Normal time + All allowances
= Normal time + [3% + 10% + 2%] of normal time
= 0.825 min. + (0.15 × 0.825) min.
= 0.825 min. + 0.124 min.
= 0.949 min.
= 0.95 min.
Standard time is the basis for calculation of standard output (i.e., no. of components
produced) in 1 day or in 1 shift (of 8 hours). Incentive schemes are based on the
standard output.
19. From the records of an oil mill, the following data are available,
(a) Raw materials
Opening stock = Rs. 1,40,000
Closing stock = Rs. 1,00,000
Total purchases during the year = Rs. 2,00,000
(b) Finished goods
Opening stock = Rs. 20,000
Closing stock = Rs. 30,000
Sales = Rs. 6,00,000
(c) Direct wages = Rs. 1,00,000
(d) Factory expenses = Rs. 1,00,000
(e) Non-manufacturing expenses = Rs. 85,500
Find out what price should be quoted for a product involving an expenditure of
Rs. 35,000 in material and Rs. 45,000 wages. Factory expenses to labour cost is
100%. (16marks) (AU M/J 2012)
Solution
Direct material cost = Opening stock + Total purchases Closing stock
= 1,40,000 + 2,00,000 1,00,000
= Rs. 2,40,000
Direct material cost = Rs. 2,40,000
Direct wages = Rs. 1,00,000
Factory expenses = Rs. 1,00,000
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Total cost = Prime cost + Factory expenses + Office expenses + Sales and distribution
expenses
= 13,040 + 5,760 + 3,840 + 480
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= Rs. 23,120
Profit = 8 percent of Total cost
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