Cost calculations manufacturing costs

In addition to arriving at conclusions about the nature of the production resources to be deployed, the costs of these resources also have to be gauged. Manufacturer and procurement costs have to be stated for new resources to be acquired. Machine-hour rates can be given for resources that are already in place. These figures are needed in a subsequent step for calculating manufacturing costs. 

The manufacturing cost consists of direct, indirect, distribution, and fixed costs. Direct costs are raw materials, operating labor, production supervision, utihties, suppHes, repair, and maintenance. Typical indirect costs include payroll overhead, quaHty control, storage, royalties, and plant overhead, eg, safety, protection, personnel, services, yard, waste, environmental control, and other plant categories. However, environmental control costs are frequendy set up as a separate account and calculated direcdy. The principal distribution costs are packaging and shipping. Fixed costs, which are insensitive to production level, include depreciation, property taxes, rents, insurance, and, in some cases, interest expense. 

Factor Methods. A more detailed product cost estimation method is to relate manufacturing cost items to a few calculated items, such as raw materials, labor, and utihties by means of simple factors (1,2). Internal accounting groups often develop factors to use with this method. This factor method is very popular. 

Published data and shortcut estimating methods can be used to calculate the approximate manufacturing cost of a new product. However, most companies have extensive data on various items of cost such as overheads, property taxes, etc. These data should be used whenever possible to give the estimate that is most vahd for a particular company. 

The current cost per unit for each utility is usually well known in a company. Thus, the annual cost for utilities and the utilities cost per unit of production can be estimated. The latter is normally much smaller than the raw-materials and labor costs. However, a great deal more work is involved in calculating the utilities cost than for any other item in the manufacturing cost. 

Use the information given in Table 2.1 (Prices of Materials) and in Table 2.4 (Energy Content of Materials) to calculate the approximate cost of (a) aluminium, (b) low-density polyethylene, (c) mild steel and (d) cement in 2004, assuming that oil increases in price by a factor of 1.6 and that labour and other manufacturing costs increase by a factor of 1.3 between 1994 and 2004. 

Micro-scaling or bottom up approach to quality costs, where it is possible to calculate the cost of losses involved in manufacture and due to returns and/or claims. This method requires a great deal of experience and relies on the availability of detailed cost data throughout a product s life-cycle. While this is a crucial activity for a business, it is also not a practical approach for estimating the quality cost for product in the early stages of product development. 

Cost of business interruption. The cost of business interruption is significantly influenced by various commercial factors. For example, if you are not producing at fiill capacity it may be possible to make up lost production at other facilities or when the plant comes back into operation. The business interruption costs will only be the additional costs of production, transportation and any lost sales. As these conditions can vary from month to month it may be more appropriate to adopt a standard method of calculating business interruption costs for PSM and ESH purposes. One commonly adopted approach is to estimate the tonnage of production lost and calculate the cost as being the difference between the sale price and all manufacturing, storage and transportation costs. 

A price calculation is relatively easy for a product with a track record of a regular industrial-scale production. On the other hand, it is difficult, if only a laboratory procedure exists and a calculation has to be made based on the virtual scaleup to industrial-scale production. The ability to perform this desk exercise in a quick and reliable fashion is an important competence criterion of a fine-chemical manufacturer. When setting a price, a separation of tasks must be made between the controller, who calculates the manufacturing cost, and the sales manager, who determines the sales price. If mistakes have been made and prices have to be changed, you will need facts to support your request. If a pivotal product is supplied, a supply contract is concluded. 

Calculation of landed costs at the demand locations is a particularly important analysis. Traditional analyses often focus on comparing unit manufacturing costs. However, the landed costs determine the profitability and competitiveness of a business. Calculating landed costs cannot be achieved... 

Based upon the process flow diagram and the investment costs, the product manufacturing costs or the necessary yield in the micro structured reactor plant to reach an overall profit of, for example at least 20%, will be calculated. 

Estimates of future costs for manufacturing refinery hydrogen have been calculated for the period 1980-2000 using 1980. The procedure involves comparing escalation rates during this period for each component of total cost with the general escalation rate of 5.0% per year for the general economy. Thus, if natural gas increases at 6.5% per year, the natural gas price for 1980 in 1980 is increased by about 1.5% per year to obtain the natural gas price (in 1980 ) for the year in question. For example, assume the natural gas price in 1980 (1980 ) is 3.15 per million Btu. The price in the year 2000 would then be ... 

In the case of carbon steel reinforcement, restoration work is required within a 20-yr period. The restoration work means longer journeys, delivery delay, consumption of more fuel by idling cars, added costs due to drilling, blasting, crushing, and transport of aggregate, cement and the related consumption of energy in the manufacture need to be considered in the calculation of costs. These are indirect costs applicable in the case of carbon steel reinforcements, while stainless steels are free from these indirect costs. 

Another technique that Ernst et al.5 utilized was to reduce the temperature of the fermentor to 15°C during the induction phase. This reduced the inclusion body formation, and achieved soluble heparinase I at a level of 4.1 mg/g dry cell weight. Their calculations indicated that the manufacturing cost in this case would be 653,000 per kilogram. This is only 16% higher than the cost obtained for the insoluble heparinase I expression method. 

The cost of laboratory tests for control of operations and for product-quality control is covered in this manufacturing cost. This expense is generally calculated by estimating the employee-hours involved and multiplying this by the appropriate rate. For quick estimates, this cost may be taken as 10 to 20 percent of the operating labor. 

Now the second part of the exercise the model lets you find out how sensitive the value of the project is to your assumptions. Unless your assumptions are terribly bad, the results can be very useful in deciding on alternative development paths. Factors that are usually considered in the sensitivity analysis are the effects of development time, sales volume, product manufacturing cost and development cost. Calculating their effect may seem a lot of work, but the spreadsheet gives results quickly. 

Figure 16-12 shows the four sensitivities that are usually calculated the effects of changes in development time, sales volume, manufacturing cost and development cost. Experience shows that changes are usually more or less linear in these variables, and that the estimation of changes is more reliable than that of the value of the project. 

Raw Materials The cost of raw materials is normally the largest item of expense in the manufacturing cost of a product. The quantities of raw materials consumed can be calculated from material balances. 

The percentage markup on cost is calculated for a known capital-turnover ratio and a desired rate of return on capital. As with absorption pricing, the percentage markup on manufacturing cost per unit of production is calculated for a normal annual production rate. If this production rate is exceeded, the rate of return on capital will be higher than projected because of the decrease in unit cost. Conversely, if the... 

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