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Cost Estimation

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Balaji Kurra
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198 views35 pages

Cost Estimation

Uploaded by

Balaji Kurra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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COST ESTIMATION

Cost Estimation
Is the Process of
FORECASTING the
expenses
that must be incurred to
Manufacture a product
Cost Estimation
Is the joint activity of
Engineers
- Physical data
Cost Accountants
- Costing Data
Before Manufacturing After

Cost Estimation Costing (or)


Cost Accounting
Purpose Of Cost Estimation

1. To determine selling Price


Total Manufacturing Cost + Profit = Selling
Price

2. To decide Economics of

Manufacturing VS 1. Out Sourcing


2. Purchasing
3. To determine most
Economical process or
Material.

4. To Initiate Cost Reduction


Methods
5. To determine the Standards
of Production Performance.

6. Check the Quotations given


by Vendor
Elements Of Cost

Total Manufacturing Cost

Material Work men Expenses


Cost Cost
Material Cost
A+B
A: Raw material for Manufacturing and
Assembled –
steel, Cast Iron, Aluminum, Brass etc..

B : Standard Purchased Items


- Motors, Bearings
- Electrical, Electronics items
- Hydraulic Valves etc..
Material Cost
A : Direct Material
- Raw Material
- Standard Parts

B : Indirect Materials
- Materials used for Processing
direct materials.
- Coolants, Lubricants, Oil, gas
- Quenching oils for HT
- Electrodes etc….
Workmen Cost
a)Direct Workmen Cost
- Workmen who actually
process raw material to
finish product by
machines or Manually.
b) Indirect Workmen Cost

- Those help in running the Plant


- Supervisory staff
- Maintenance / Stores personnel
- Helpers
- Designers and all others who
assist Manufacturing
Expenses
Direct Expenses:
Those expenses directly chargeable to the
products
₋ Cost of Patterns, Jigs, Fixtures, Dies,
Special Drawings
₋ Cost of Experimental work done
₋ Cost transportation charges for special
material for this product
₋ Hiring of special Equipment – CMM, Laser
calibration etc.
Indirect Expenses:

₋ Factory Expenses or
Overheads
₋ Office and Administrative
Expenses
₋ Selling and distribution
expenses
Add OVERHEADS

What is Overhead ?
It is the expenditure of the organization which we
Cannot Apportion to any specific product or service.

There are two types of overheads :

1. Fixed overheads
2. Variable overheads
1. Fixed Overheads :
These are the expenses fixed irrespective of
production volume.
Example : Salaries of supervisory staff, personnel in
admn. Finance etc.

2. Variable overheads ; the expenses which vary


according to the volume of production.
Example ; electricity bill, material cost, water charges
Indirect expenses are also classified
According to departments.
1. Factory overheads :
* Salaries of supervisory staff
* Factory rent, office rent
* Electricity bills, water charges
* Repairs and maintenance
* Depreciation cost of plant and
machinery
2. Office or administrative overheads
* Office rent
* Salaries of Office staff
* Stationary charges
* Telephone bills etc.
* Auditing charges etc.
3. Selling overheads
# Rent of sales office, show rooms
# Salaries of sales staff
# Stationary and telephone charges
# Commission to the salesmen
# Advertisements and other sales
promotion activities (exhibitions)
# Travelling expenses of sales staff
4. Distribution expenses
^ rent of godowns
^ salaries of distribution personnel
^ packing charges
^ transportation charges
^ loading and unloading charges
DEPRECIATION :

While assessing the cost of any machine


or equipment, we have to consider the
depreciation factor.

Depreciation is defined as the reduction in


the efficiency and value of the machine or
asset with the lapse of time during its use.
Causes of depreciation :
1. Depreciation due to
** wear and tear
2. ** physical decay
3. ** accidents
4. ** negligence and poor maintenance
5. ** obsolescence
Depreciation fund
= Initial cost of machine + Installation
charges – scrap value
Scrap value : it is the value of machine or
fixed asset at the end of its useful life
period. Also called as salvage value or
residue value”
Book value : The value of any machine or
asset at the end of any particular year
during its life span is called “ book value”
Methods for calculating depreciation
1. Straight line method
2. Sinking fund method
3 Reducing balance method
4 Annuity charging method
5 Sum of year’s digit method
6 Insurance policy method
7 Machine hour basis method
Straight line method :
C–S
D= N
Where D = Rate of depreciation or
depreciation per year
C = Initial cost of machine
+ Installing charges
S = scrap value
N = life span
Estimation of component cost

Procedure for estimation of


Component weight and cost

1. Study the given drawing


2. Split up the component into
different solid shapes
3. Calculate volumes of different
shapes and total volume
4. Calculate the total weight of the
component
weight = volume X density
5. Calculate the cost of component
cost of component
= weight x unit price of weight
Elements Of Cost:

1.Prime Cost (or) Direct Cost =


Direct Material + Direct
Workmen + Direct Expenses
(if any)
2. Factory Cost = Prime Cost
+ Factory Expenses

Factory cost is also called as


‘Works Cost’
3.Manufacturing Cost =
Factory Cost +
Administrative Expenses

Manufacturing cost is also


called as “COST OF
PRODUCTION”
4. TOTAL COST =
Manufacturing cost +
Selling and Distribution
expenses
5.SELLING PRICE = TOTAL COST
+ PROFIT

TOTAL COST + PROFIT =


SELLING PRICE
CLASSIFICATION OF COSTS:

A. Nonrecurring Costs
B. Recurring Costs
_______________________________________________________

a) Fixed Cost.
b) Variable Cost
_______________________________________________________

a. Direct Cost
b. Indirect Cost.

Working Capital
1.ESTIMATION OF DIRECT MATERIAL
COST

2.ESTIMATION DIRECT LABOUR


COST

i. Set-Up time
ii. Handling time
iii.Machining Time
iv. Tear down Time
v. Down Lost Time
vi. Allowances

a) Personal Allowances.
b)Fatigue
c) Time to Change Tools
d)Inspection or Checking Allowances

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