0% found this document useful (0 votes)
75 views29 pages

ME8793 Process Planning and Cost EStimation UNIT 3 QB

This document discusses concepts related to cost estimation. It provides definitions of key terms like overhead, contingency allowance, and under estimation. It lists different types of estimates and sources of cost data. Allowances included in cost estimation are explained. Different elements of cost like material, labor, and other expenses are listed. The need to include allowances and the effect of overestimation are described. Objectives of cost estimation are stated as calculating costs of materials, labor, equipment, overhead charges, and profit to determine a selling price.

Uploaded by

LEO PRAVIN P
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
75 views29 pages

ME8793 Process Planning and Cost EStimation UNIT 3 QB

This document discusses concepts related to cost estimation. It provides definitions of key terms like overhead, contingency allowance, and under estimation. It lists different types of estimates and sources of cost data. Allowances included in cost estimation are explained. Different elements of cost like material, labor, and other expenses are listed. The need to include allowances and the effect of overestimation are described. Objectives of cost estimation are stated as calculating costs of materials, labor, equipment, overhead charges, and profit to determine a selling price.

Uploaded by

LEO PRAVIN P
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 29

www.edubuzz360.

com
ME8793/Process Planning & Cost Estimation Year/sem:IV/VII

Unit 3 Introduction to Cost Estimation


Part A

1. )
Relaxation Allowance
Fatigue allowance
Personal need allowance
Process allowance
Interference allowance
Contingency allowance
Special allowance
2. (AU N/D

Costing may be defined as a system of accounts which systematically and


accurately records every expenditure in order to determine the cost of a product after
knowing the different expenses incurred in various department.
3.
Overhead is the sum of indirect labour cost, indirect material cost and other
expenses including service which cannot be conveniently charged to specific cost
unit. These can be further classified as
Production expenses/Factory expenses.
Administrative expenses.
Selling expenses.
Distribution expenses.
4. Distinguish between cost estimation and cost accounting
(AU N/D
S.No Point of Cost estimating Cost accounting
comparison
1. Type of It gives an expected cost of the It gives actual cost of the
cost product based on the product cost based on the
calculations by means of data collected from the
standard formulae or certain different expenditures
established rules. actually done

5. List the types of estimates (AU


Guesstimates
Budgetary
Using Past History
Estimating in Some Detail
Estimating in Complete Detail
Parametric Estimating
Project Estimating
6. What are the sources of for cost estimation? (AU
Cost of design.
Cost of drafting.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

Cost of research and development.


Cost of raw materials.
Cost of labour.
Cost of inspection.
Cost of tools, jigs and fixtures.
Overhead cost.
7.
Study the drawing carefully and break up the component into simple geometrical
shapes. (Cubes, prisms, cylinders, etc.)
Add the necessary machining allowances on all sides which are to be machined.
Determine the volume of each part by applying the formulae of mensuration.
Add the volumes of all the simple components to get total volume of the product.
Multiply the total volume of the product by the density of the material to get the
weight of the material.
Find out the cost of the material by multiplying the cost per unit weight to the total
weight of the material.
8. Define: Under estimate
The estimated cost is below the actual cost of product, then the firm will face
huge financial loss which may cause utter failure or closure of the firm. This
estimation is called under estimate.
9. Define: Contingency Allowance
Contingency Allowance: This is a small allowance of time which may be
included in the standard time to meet unforeseen items of work, or delays (e.g.
waiting for raw materials, tools). Contingency allowance is 5% (maximum) or
Normal Time.
10. What is meant by conceptual cost
In the conceptual design stage, the geometry of parts and materials has 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.
11.
Prime cost = Direct material cost + Direct labour cost + Direct expenses
12. What is the need to include allowances in cost
A worker cannot work for 8 hours continuously without rest. Also efficiency
decreases as the time passes due to fatigue etc. He also requires for tool sharpening,
checking measurements and personal calls. All these allowances come under this
category. These allowances generally consumes 15 to 20% of total time.
13.
Process costing.
Job costing.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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

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.
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.
17.
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.
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.
18. What is meant by direct material? Give example.
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 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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

19. What is meant by 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.

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

Both over-estimate and under-estimate may prove to be dangerous and


harmful for a concern. Assume that on the basis of an estimate, the concern has to fill
up a tender enquiry. The overestimate means the concern will quote a higher rate and
thus will not get the job or contract. In case of an under-estimate, the concern will get
the contract but it will not be able to complete the work within that small quoted
amount and hence will suffer heavy losses. This emphasizes the importance of
making realistic estimates. Realistic estimates are very essential for the survival and
growth of a concern.
Part B
1. Discuss various methods of costing in detail. (8 marks) (AU M/J

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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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.

(b) Job costing or order costing


Job costing is concerned with finding the cost of each individual job or
contract. Examples are to be found in general (job order) engineering
industries, ship building, building contracts, etc.
The main features of the system is that each job has to be planned and costed
separately.
Overhead costs may be absorbed on jobs on the basis of actual costs incurred
or on predetermined costs.
The process of determining in advance what a job or order will cost is known
as estimating.

It involves consideration of the following factors for each job/order:


1. Materials requirements and prices to arrive at the direct material cost.
2. Labour hours and rates to determine labour costs.
3. Overhead costs.
4. Percentage added to total cost to cover profit.

A record of above costs per unit time is kept in separate cost sheets.

(c) Batch costing

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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

Thus, for example, if 100 units of a component, say a reflector are to be


manufactured, then the costing would be as far a single job. The unit price would be
ascertained by dividing the cost by 100.

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.

(d) Hybrid costing systems


Many costing systems do not fall nearly into the category of either job costing or
process costing. Often systems use some features of both main costing systems.
Many engineering companies use batch costing, which treats each batch of
components as a job and then finds the average cost of a single unit.
Another variation is multiple costing, used when many different finished products
are made. Many components are made which are subsequently assembled into the
completed article, which may be bicycles, cars, etc. Costs have to be ascertained
for operations, processes, units and jobs, building together until the total cost is
found.
Different names may be used to describe either process costing or job costing.
Thus, for example, unit costing is the name given to one system where there is a
natural unit, such as sack of flour, a barrel of beer etc.
In unit costing method, the expenses on various items are charged per unit
quantity or production.
Operation costing is a variation of unit costing, and is used when production is
carried out on a large scale, popularly known as mass production.
Operation costing is the term applied to describe the system used to find the cost
of performing a utility service such as transport, gas, water or electricity.
In this method, the cost per unit is found on the basis of operating expenses
incurred on various items of expenditure.
Unit costing, operation costing and operating costing are variations of process
costing.
Contract or terminal costing is the name given to job costing employed by
builders and constructional engineers.
All these methods ascertain the actual cost.

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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

Determine the cost of parts to be purchased from outside.


Estimate the material cost for the parts/components to be manufactured in plant.
Make manufacturing process plan for the parts to be manufactured in plant.
Estimate the machining time for each operation listed in the manufacturing
process plan.
Multiply each operation time by the labour wage rate and add them up to find
direct labour cost.
Add the estimate of step 4, 5, and 8 to get prime cost of component.
Apply overhead costs to get the total cost of the component.
3. Discuss the objectives of the cost estimation (10 marks)

The main purpose or objectives of estimating are


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.
To establish a standard of performance at the start of project.
For feasibility studies on possible new products.
To assist in long term financial planning.
To prepare production budget.
To help in responding to tender enquiries.
To evaluate alternate designs of a product.
To set a standard estimate of costs.
To initiate programs of cost reduction that result in economics due to the
use of new materials, which produce lower scrap losses and which create
savings due to revisions in methods of tooling and processing, and
To control actual operating costs by incorporating these estimates into the
general plan of cost accounting.

4. Describe the classification and elements of cost. (16 marks) (AU

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

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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.

(B) Labour Cost

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

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

indirect labour includes supervisors, inspectors, foreman, storekeeper, gatekeeper,


maintenance staff, crane driver etc. The cost associated with indirect labour is called
indirect labour cost. The indirect labour costs cannot be identified with a particular job or
product but are charged on the total number of products made during a particular period
in a plant.

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.

(C) Other Expenses

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

(ii) 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

(c) Selling and distribution expenses: This is the expenditure incurred on Sales
Department for selling the product, i.e., wages, salaries, commission and travelling

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

allowances of salesmen and officers in Sales Department, cost of advertisement,


packing, delivery and distribution expenses, rent of warehouses etc.

5. Discuss various types of estimates (10 marks)


Types of Estimate
Estimates can be developed in a variety of different ways depending upon the
use of the estimates and the amount of detail provided to the estimator. Every
estimator should understand every estimating method and when to apply each,
because no one estimating method will solve all estimating problems.
Guesstimates
Guesstimate is a slang term used to describe as estimate than lacks detail. This
type of estimate relies on the estimators experience and judgment. There are many
reasons why some estimates are developed using his method. One example can be
found in the tool and die industry. Usually, the tool and die estimator is estimating
tool cost without any tool or die drawings. The estimator typically works from a piece
part drawing and must visualize what the tool or die looks like. Some estimators
develop some level of detail in their estimate. Material cost, for example, is usually
priced out in some detail, and this brings greater accuracy to the estimator by reducing
error. If the material part of the estimate has an estimating error of plus or minus 5 per
cent and the reminder of the estimate has an estimating error of plus or minus 10 per
cent, the overall error is reduced.

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.

Using Past History


Using past history is a very popular way of developing estimates for new
work. Some companies go to great lengths to ensure that estimates are developed in
the same way actual cost is conducted. This provides a way past history in developing
new estimates. New advancements in group technology now provide a way for the
microcomputer to assist in this effort.

Estimating in Some Detail


Some estimators vary the amount of detail in an estimate depending on the
risk and dollar amount of the estimate. This is true in most contract shops. This level
of detail might be at the operation level where operation 10 might be a turning
operation and the estimator would estimate the setup time at 0.5 hours and the run
time at 5.00 minutes. The material part of the estimate is usually calculated out in
detail to reduce estimating error.

Estimating in Complete Detail


When the risk of being wrong is high or the dollar amount of the estimate is
high, the estimator will develop the estimate in as much detail as possible. Detailed
estimates for machinery operations, for example, would include calculations for

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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.

6. Explain the data requirements for cost estimation (6 marks)

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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

13. Budget estimates prepared by the company for new projects/products.


14. Journals or Data sheets of Professional Associations dealing with Costs and
Accounting.
7. Describe different methods of estimates (10 marks)
Methods of Estimates
Computer Estimating
Computer estimating has become very popular in recent years primarily
because of the advent of the microcomputer. Early efforts of computer estimating date
back to the early 1970s but were cumbersome to use because they were on a
mainframe and were card-driven. No less than 15 U.S. companies now offer
estimating software for a microcomputer. Because the computer estimating industry is
new, there are no real standards for estimating programs. Some programs are nothing
more than a way to organize the calculations of an estimate, while others calculate all
the details of the estimate.
Advantages and disadvantages
Shown below are some of the major advantages of computer cost estimating.
Accuracy versus consistency
Computer estimates are very consistent, provided they calculate the detail of
an estimate. Because these estimates are consistent, they can be made to be accurate.
Through the use of consistent efficiency factors or leaving curves, estimates can be
adjusted up or down. This is one of the chief advantages of computer cost estimating.
Levels of details
Some computer estimating systems provide different levels of estimating cost.
The level of detail selected by the user depends on the dollar risk. Many estimators
produce an estimate in more detail because the computer can calculate speeds and
feeds, for example, much faster than an estimator can a hand-held calculators.
Refinements
Some computer estimating systems provide many refinements that would be
impossible for the estimator to do in any timely manner. One example is to adjust
speeds and feeds for material hardness. Typically, the harder the material the more
slowly a part will be turned or bored. Another refinement is the ability to calculate a
feed state and adjust it based on the width of a form tool.
Source code
Some companies offer the source code uncompiled to their users. This is
important because it affords the user the opportunity to customize the software. In
addition, many companies have written their own software to do something that is not
available on the market. If the source code is not compiled, the users can build upon a
computer estimating system.
Disadvantages
The chief disadvantage of computer estimating is that no one estimating
e code is compiled
and not customizable.
Another problem with computer estimating is that the estimator will, in all
probability, have to change some estimating methods. Computer software for
estimating cost is seldom written around one method of estimating.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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.

Use for group technology


Shown below are several uses for group technology along with several
examples of use both internally and externally.
Cost estimating
GT can be used very efficiently in estimating cost. Assume a company
manufactures shaft-type parts. Also arsum there is a computer data base named
SHAFT that contains 10-digit code followed by a part number, that is, code part
number, and so on. When an estimator must estimate the cost of a new shaft, the
process starts by developing a code that describes the characteristics of the part. The
first digit in the code might be assigned the part length, while the second digit is
assigned the largest diameter and so on. Next, the code is keyed in and the computer
finds all the parts that meet the numeric descriptions and points out the part numbers.
The best fit is selected to be modified into a new part. All the details of each
description are retrieved. These include diameter, length of cut, number of surfaces,
and the like. The estimator can alter these features and make the old part into a new
one.
Actual performance
As the part is being produced, the estimated information is updated with actual
performance and refined. This gives the estimator the ability to improve estimating
accuracy, because the next time, the computer finds that part as one to be modified
into a new one, the estimator is working with actual performance.
Parametric Estimating
Parametric estimating is the act of estimating cost or time by the application of
mathematical formulas. These formulas can be as simple as multiplices or as complex
as regression models.
Parametric estimating, sometimes refused as statistical modeling, was first

military hardware cost.


Use of parametric estimating
Many companies use some form of parametric estimating to develop sales
forecasting. The four examples cited below will give the reader a good feel of how
parametric estimating is used in a variety of different industries.
Construction industry
In developing a cost estimate for residential buildings, some cost estimators
use a dollar value per square foot. The estimator constitutes curves based on different
construction such as wood on brick buildings and single or multi-storey dwellings.
These numbers can then be multiplied by the number of square feet in the building.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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.

8. Explain the allowances in estimation (6 marks)

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 :

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

(i) Fatigue allowance, and


(ii) Personal needs allowance.
(i) Fatigue allowance is intended to cater for the physiological and psychological
effects of carrying out the work.
This time allowance is provided to enable to operator to overcome the effect of
fatigue which occurs due to continuous doing of the work (monotony etc.).
Relaxation allowance (Fatigue allowance and Personal needs allowance put together)
is commonly 5% to 10% (of normal time).
(ii) Personal needs allowance: This allowance is provided to enable the operator to
attend to his personal needs (e.g. going to toilet, rest room, etc.).
2. Process Allowance: It is an allowance to compensate for enforced idleness of the
worker.
During the process, it may be likely that the operator is forced to be idle due to
certain reasons, such as:
When the process is carried out on automatic machines, (the operator is
idle after loading the job on the machine).
When the operator is running more than one machine (as in the case of
cellular manufacturing)
Process allowance varies from one manufacturing situation to another
depending on factors such as hazardous working conditions, handling of heavy loads,
strain involved, mental alertness required etc. Generally 5% of the normal time is
provided towards process allowance.
Interference Allowance : This allowance is provided where in a cycle of operation,
there are certain elements which are machine controlled. The operator cannot speed
up those elemental operations.
This allowance is also provided when one worker is working on several machines.
4. Contingency Allowance : This is a small allowance of time which may be
included in the standard time to meet unforeseen items of work, or delays (e.g.
waiting for raw materials, tools). Contingency allowance is 5% (maximum) or
Normal Time.
5. Special Allowances : These allowances are a policy matter of the management,
e.g. when the job is newly introduced or when a new machine or new method is
introduced, because worker takes some time to learn the new method or job; Special
allowance is also provided depending on the working conditions such as noise, dust,
etc.
Once the normal time is obtained, the standard time can be estimated or
obtained by adding all the allowances to normal time.
Standard time = Normal time + Allowances
9. Write the difference between cost accounting and cost estimation (8 marks) (AU

Points of
Cost estimating Cost accounting
comparison

1.Types of It gives an expected cost of the It gives actual cost of the product

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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.

A qualified technical person or It can be done by a person qualified


engineer having a thorough for accounts instead of a technical
3.Nature of
knowledge of the drawings and person. Thus, this work instead of
quality
manufacturing process is being of technical nature is more of a
required. clerical work

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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

The disadvantages of this method are


i. The estimate is subjected to bias.
ii.
iii. The estimate may not reflect the complexity of the product or project.
iv. Reliable data base for future estimates are not possible.
In spite of these disadvantages, the expert opinion is useful when
historical data base is not available. It is also useful to verify cost estimate
arrived at using other methods of conceptual estimating (like analogy methods
and formula based methods).

(b) Conceptual Method Based on Analogy


Analogy estimating derives the cost of a new product based on past cost data
of similar products. Cost adjustments are made depending on the differences between
the new and previous product/system. Analogy estimating requires that the products
be analogous or similar and products manufactured using similar facilities or
technology. If the technology changes, the analogy estimating relationship has to
changed to reflect the changes in technology. Another limitation of this method is that
analogy estimates often omit important details that makes cost considerably higher
than the original cost estimates.

(c) Conceptual Method Based on Formula


There are formula based methods that are primarily used in the conceptual cost
estimating. These are :
(i) Factor method,
(ii) Material cost method,
(iii) Function method, and
(iv) Cost-size relationship.
These methods are known as Global cost estimation methods and they generally use
one of the above methods only.

(i) Factor method


This is the simplest method, but it can give reliable estimates if the data are kept up-
to-date, taking into consideration factors such as inflation, and environmental issues
which tend to increase the cost.

(ii) Material cost method


Material cost method is justified since the material cost is the largest cost item in the
prime cost of many manufacturing companies.
According to this method :
Estimated cost of an item =
(iii) Function method
In function method more variables are used and the expressions are non-linear. The
function is basically a mathematical expression with constants and variables that
provides a mathematical function for the cost estimate. One expression is given
below:

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

11. Discuss about determination of material and labour cost. (8 marks)


Determination of Material Cost
To calculate the material cost of the product the first step is to study drawing of the
product and split it into simple standard geometrical shapes and to find the volume of
the material in the product and then to find the weight. The volume is multiplied by
density of the metal used in the product.
The exact procedure to find the material cost is like this:
1. Study the drawing carefully and break up the component into simple geometrical
shapes. (Cubes, prisms, cylinders, etc.)
2. Add the necessary machining allowances on all sides which are to be machined.
3. Determine the volume of each part by applying the formulae of mensuration.
4. Add the volumes of all the simple components to get total volume of the product.
5. Multiply the total volume of the product by the density of the material to get the
weight of the material.
6. Find out the cost of the material by multiplying the cost per unit weight to the total
weight of the material.
12. Discuss in detail about the computation of price of a product using the ladder of
cost with appropriate example. (16 marks)
The elements of cost can be combined to give following types of cost:

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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

3. Office cost: It consists of factory cost and administrative expenses.


Office cost = Factory cost + Administrative expenses
It is also named as manufacturing cost (or) cost of production.
4. Total cost: It includes manufacturing cost and selling and distribution expenses.
Total cost = Manufacturing cost + selling and distribution expenses.

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 =

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

Percentage on Direct Labour Cost


In this method, allocation of on-cost depends upon the wages paid to the direct
labour. This method is very reasonable and simple in calculation. Therefore, this
method is very popular. It is the ratio of the total overhead to the direct labour cost for
a particular period.
Overhead rate =
It is also called as labour burden rate. It is the ratio of the annual total
overheads to the annual direct labour cost.
Overhead cost = Overhead rate X Direct labour cost/unit.
This is very suitable where production is mainly carried out by hand. It may
not be an accurate indicator where machines of greatly different capacity and sizes are
operated. Also if two products take the same time but labour rate for both is different
then this method will give less overhead cost where labour is cheap and high overhead
cost where labour is costly. Therefore, this method increases the cost of a component
which has already higher labour cost. Also, in many case it gives very approximate
results because sometimes of overhead such as depreciation and taxes have very little
relationship to labour costs.

Percentage on Prime Cost


This is a very simple method. So it has gained popularity. This method is
suitable, where labour and material both play equal role. This method will give the
same overhead cost for two products with equal prime cost, even though their labour
and material costs will be different. This will be useful where only one type of
product is being manufactured and when direct labour and direct materials costs are
nearly equal.
Overhead rate =
Then, overhead cost/unit = Overhead rate X Prime cost/unit.

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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

(iii) Insurance = (2000 ×15) / (30+15)


= Rs. 666.66
(iv) Power consumption = Rs. 1000.00
(v) Depreciation = Rs. 3000.00
Total overheads = Rs. 11332.32
Machine hour rate for shapers = 11332.32/ 8000
= Rs. 1.42
15. Calculate prime cost, factory cost, production cost, total cost and selling price
per item from the data given below for the year 2003-04.
Cost of raw material in stock as on 1-04-2003 Rs. 25,000
Raw material purchased Rs. 40,000
Direct labour cost Rs. 14,000
Direct expenses Rs. 1,000
Factory/Works overhead Rs. 9,750
Administrative expenditure Rs. 6,500
Selling and distribution expenses Rs. 3,250
No. of items produced Rs. 650
Cost of raw material in stock as on 31-03-2004 Rs. 15,000
Net profit/item is 10 percent of total cost of the product.
(16 marks)
Solution :
For 650 units produced during 2003-04
(i) Direct material used = Stock of raw material on 1-04-2003 + raw material
purchased stock of raw material on 31-03-2004
= 25,000 + 40,000 15,000
= Rs. 50,000
(ii) Direct labour = Rs. 14,000
(iii) Direct expenses = Rs. 1,000
Prime cost = 50,000 + 14,000 + 1,000
= Rs. 65,000
Factory cost = Prime cost + Factory expenses
= 65,000 + 9,750
= Rs. 74,750
Production cost = Factory cost + Administrative expenses
= 74,750 + 6,500
= Rs. 81,250
Total cost = Production cost + Selling expenses
= 81,250 + 3,250
= Rs. 84,500
Selling price = 84,500 + 10 percent of 84,500
= 84,500 × 1.10 = Rs. 92,950

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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

(ii) Factory overheads are :


Rs.
Rent, taxes and insurance of factory 16,000
Depreciation of plant and machinery 8,000
Water, power and telephone bill of factory 9,600
Material transportation in factory 2,000
Repair and maintenance of plant 1,000

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

Work Manager salary 30,000


Factory overheads or Factory cost 66,600
Factory cost = Prime cost + Factory expenses
= 3,89,000 + 66,600
= Rs. 4,55,600

(iii) Administrative/office expenses are :


Rs.
Depreciation of office equipment 2,000
General administrative expenses 3,400
Water, lighting and telephone bills of office 2,500
Rent, insurance and taxes on office building 2,000
Salary of office staff 60,000
Total 69,900
Production cost = Factory cost + Office expenses
= Rs. 4,55,600 + Rs. 69,900
= Rs. 5,25,500
(iv) Selling overheads are :
Commission and pay to salesmen = Rs. 10,500
Total cost = Production cost + Selling expenses
= 5,25,500 + 10,500
= Rs. 5,36,000

(v) Profit = Sales Total cost


= 6,36,000 5,36,000
= Rs. 1,00,000

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.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

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

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

Factory cost = Direct material + Direct labour + Factory overheads


= 2,40,000 + 1,00,000 + 1,00,000
= Rs. 4,40,000/-
Non-manufacturing expenses = Rs. 85,000
Total cost = Factory cost + Non-manufacturing expenses
= 4,40,000 + 85,000
= Rs. 5,25,000/-

Factory expenses of direct labour cost = 100%


Non-manufacturing expenses = 85000/4, 40,000 = 19.31%
Cost of finished goods = Opening stock + cost of goods Closing stock
= 20,000 + 5,25,000 30,000
= 5,15,000
Cost of finished goods = Rs. 5,15,000/-
Total sales = Rs. 6,00,000
Profit = Rs. 6,00,000 5,15,000
Profit to sales cost = 85,000/5,15,000 = 16.5%

The cost of the product to be quoted is listed down as follows:


Direct material cost = Rs. 35,000
Direct labour cost = Rs. 45,000
Factory expenses = 100% of wages
= Rs. 45,000
Factory cost = Direct material cost + Labour cost + Factory expenses
= 35000 + 45000 + 45000 = 1,25,000
Factory cost = Rs. 1,25,000

Administrative and selling expenses = Non-manufacturing expenses


= 19.31% of factory cost
= Rs. 24,137.50
Total cost = 1,25,000 + 24137.50
= Rs. 1,49,137.50
Total cost = Rs. 1,49,137.50
Profit = 16.5% total cost
= Rs. 24,607.68
Profit = Rs. 24,607,68/-
Quotation price = 1,49,137.50 + 24,607.68 = 1,73,745.1875

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

Quotation price = Rs. 1,73,745.1875/-


Selling price = Total cost + Profit
= 3410 + 682 = Rs. 4092/-
Cost per unit = 4092 / Number of units
= 4092 / 50
= Rs. 81.84
List price = Selling price + Discount
= Selling price + 20% list price
-
Now, x = 81.84 + (20x/100)
x = 81.84 + 0.2 x
0.8 x = 81.84
x = 102.30
List price = Rs. 102.30.
20. Calculate the selling price per unit from the following data :
Direct material cost = Rs. 8,000
Direct labour cost = 60 percent of direct material cost
Direct expenses = 5 percent of direct labour cost
Factory expenses = 120 percent of direct labour cost
Administrative expenses = 80 percent direct labour cost
Sales & distribution expenses = 10 percent of direct labour cost
Profit = 8 percent of total cost
No. of pieces produced = 200 (16 marks) (AU A/M 17) (AU N/D 17)
Solution :
Direct material cost = Rs. 8,000
Direct labour cost = 60 percent of direct material cost

Total cost = Prime cost + Factory expenses + Office expenses + Sales and distribution
expenses
= 13,040 + 5,760 + 3,840 + 480

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

= Rs. 23,120
Profit = 8 percent of Total cost

= Rs. 1,850 (say)

Selling price = Total cost + Profit


= 23,120 + 1,850
= Rs. 24,970

21. Describe the various components of job estimate. (16 marks)


Components of a cost estimate or job estimate
The total estimated cost of a product consists of the following cost components :
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.
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. This may be done on the basis of similar
job previously manufactured but for new and complicated jobs the estimator has to
consult the designer who gives the estimated time of design. 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.
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.
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 which include :
(i) Cost of labour involved.
(ii) Cost of material used.
(iii) Cost of special equipment used or fabricated for the prototype.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360
www.edubuzz360.com

(iv) Depreciation, repair and maintenance cost of experimental set-up.


(v) Cost of services of highly qualified and trained personnel needed for
experimentation.
(vi) Cost of preparing Test Reports, if any.
In some cases the cost of R and D may be estimated on the basis of research involved
in similar products produced in the past.
4. Cost of Raw Material
The estimation of cost of materials used in production of a component/product
consists of following steps:
(i) A list of all the materials used in the manufacture of the product is made which
includes the direct as well as indirect materials.
(ii) 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.
(iii) 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.
(iv) Estimated cost of all the materials is added to get the overall estimated material cost.
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. For this purpose, the estimator
may consult engineers, supervisors or foremen from
production or industrial engineering departments.
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. The cost of inspection equipment, gauges and consumable involved in the
inspection and testing are taken into account while estimating the cost of the product.
7. Cost and Maintenance Charges of Tools, Jigs and Fixtures
Estimated cost of a product includes the estimated cost and maintenance charges for
the tools, jigs, fixtures and dies required in the production. 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.
8. Overhead Costs
Overhead or indirect costs are those which are not incurred specifically for any one
order or product and these cannot 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. The overhead cost per unit varies considerably with the volume of
production i.e. number of components produced.

https://play.google.com/store/apps/details?id=com.sss.edubuzz360

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy