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Cost Engineering

Cost engineering is the process of calculating the cost of a product based on technical and commercial inputs. It involves determining the costs of individual parts and the final product before production begins. This allows management to make informed decisions about manufacturing, potential design changes, and setting sale prices. Cost engineering considers direct material costs, processing costs like labor, and overhead expenses to systematically determine the total manufacturing cost of a component. It provides important guidance for budgeting, pricing strategies, and design modifications to optimize efficiency and profitability.

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Charanjeet Singh
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47 views

Cost Engineering

Cost engineering is the process of calculating the cost of a product based on technical and commercial inputs. It involves determining the costs of individual parts and the final product before production begins. This allows management to make informed decisions about manufacturing, potential design changes, and setting sale prices. Cost engineering considers direct material costs, processing costs like labor, and overhead expenses to systematically determine the total manufacturing cost of a component. It provides important guidance for budgeting, pricing strategies, and design modifications to optimize efficiency and profitability.

Uploaded by

Charanjeet Singh
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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COST ENGINEERING

INTRODUCTION: - IN THE DEVELOPING & COMPETITIVE AGE IT IS VERY MUCH


ESSENTIAL FOR AN ORGANIZATION TO HAVE ADVANCE INFORMATION ABOUT THE
COSTOF INDIVIDUAL PARTS & FINAL PRODUCT BEFORE TAKING UP THE ACTUAL
PRODUCTION. COST ENGINEERING WHICH IS PREDETERMINATION OF THE COST IS
MAINLY CONCERNED TO THE DECIDING MANAGEMENT WHICH HELPS IN DECIDING
ABOUT MANUFACTURING, NEED FOR REDESIGNING & REACHING TO THE SELLING
PRICE.
COST ENGINEERING IS THE PROCESS OF
CALCULATION OFPRODUCT COST BASED ON THEORITICAL / PRACTICAL TECHANICAL
KNOWLEDGE. THIS INVOLVES TECHO-COMMERCIAL DATA BASED INPUTS TO ACHIEVE
COST OF PRODUCT.
IN OTHERS WORDS WE CAN SAY COST
ENGINEERING IS COMBINATION OF TWO WORDS COST + ENGINEERING, THAT MEANS TO
FIND OUT THE TOTAL COST OF THE JOB BY USING ENGINEERING TECHNIQUES WHICH
FURTHER INVOLVE IN THE TIME MANAGEMENT, PRODUCTION PROCESS, VENDOR
DEVELOPMENT, PURCHASING, QUALITY.
IT IS A SYSTEM OF ENGINEERING WHICH
SYSTEMATICALLY & ACCURATELY RECORDS EVERY EXPENDITURE IN ORDER TO
DETERMINE THE COST OF MANUFACTURING OF ACOMPONENT.

IMPOTANCE OF COST ENGINEERING: - COST ENGINEERING IS OF GREAT


IMPORTANCE TO AN ORGANISATION BECAUSE IT ENABLES THE CONCERNED TO KNOW
PRICES OF A PRODUCT & GIVES ACCESS IN DECISION MAKING IN RESPECT TO
MANUFACTURING / ORDERING / SELLING PRICES / POLICIES.
OVERCOSTING / UNDERCOSTING GIVE HURDLES /
WRONG GUIDE LINES WHICH EFFECTS TIMELY DEVELOPMENT / PROFITABILITY.
COSTINGSHOULD BE WORKED OUT ACCURACTLY & SHOULD BE AS FAR AS POSSIBLE
DATA / PRACTICAL STUDY BASED.

OBJECTIVE OF COST ENGINEERING:1.)

ECONOMY IN PRODUCTION : COSTING WITH DETAIL CAN BE USED TO


ANALYSIS WASTAGE, ALTERNATE PROCESS PATH & FINALLY GIVES GUIDELINES
TO IDENTIFYSEGMENTS WHICH CAN BE CONTROLLED TO BRING DOWN THE
COST TO MINIMUM.

2.)

BUDGET: DATA WIRKED OUT BY COST ENGINEERING CAN BE USED BY COST


ACCOUNTS DEPARTMENT WHILE GIVING FINAL STRUCTURE TO BUDGET.

3.)

PRICING PLANS: COST ENGINEERING WORKEDOUT COST CAN BE USED AS


REFERENCE FOR DECIDING PRICING POLICIES OF SAPRES / FINAL PRODUCTS.

4.)

MANUFACTURE OR BUY: IT HELPS TO DECIDE WEATHER COMPONENT /


PRODUCT IS ECONOMICAL TO MANUFACTURE INPLANT OR BUY FROM OUTSIDE.

5.)

DESIGN MODIFICATION : IT GIVES GUIDELINES TO A DESIGNER TO DEVELOP


COMPONENTS TO ACHIEVE ECONOMY.

ROLE OF COST ENGINEERING


1.) COST ENGINEERING WORKS AS BRIDGE BETWEEN NEW DEVELOPMENTS &
IMPLEMENTATIONS.
2.) COST ENGINEERING ALSO WORKS AS MIRROR IN WHICH REALSTIC TOTAL COST
OF THE JOB REFLECTS
3.) COST ENGINEERING GIVES FORECAST TO ALL THE DEVELOPMENTS
CONDUCTED BY DIFFERENT DEPARTMENTS OF THE ORGANIZATION.
4.) IT HELPS IN GETTING US REALSTIC COST OF NEW PROPOSED COMPONENTS.
5.) COST ENGINEERING PATCHUPS BETWEEN THE REQUIREMENTS OF NEW
DEVELOPMENTS & MARKET AVAILIABILITY.
6.) COST ENGINEERING MAINTAINS RECORD OF MARKET PRICES OF RAW MATERIAL.
7.) COST ENGINEERING WORKS WITH MINIMUM POSSIBLE MACHINING ALLOWENCES,

BURNING SCRAP, END CUTTING WASTAGE, CYCLE TIME AND TOOL COST ETC.
8.) COST ENGINEERING CREATES LOGICAL NEGOTIATION ENVIORMENT FOR PRICE

SETTLEMENT.
9.) COST ENGINEERING CARRIES OUT REGULAR PRACTICAL TRIALS RELATED TO

GAS CUTTING, ARC/MIG/ SPOT WELDING, PROTECTIVE TREATMENT i.e. PRIMER /


OILING APPLICATION ETC. TO GIVE STRENGTH TO STANDARD DATA COLLECTONS TO
BE USED FOR COST WORKING.
10.) COST ENGINEERING WORKES OUT GRADE , SECTION WISE , MONTHLY

REQUIREMENT WHICH HELPS IN SETTLE BEST LOWEST POSSIBLE PRECOUREMENT


RATES FOR DIFFERENT VENDORS

CONTRIBUTION OF COST ENGINEERING:

SUGESSITIONS TO IMPROVE QUALITY

SUGESSITIONS FOR COST REDUCTION

SUGESSITIONS FOR NEW DEVELOPMENTS

SUGESSITIONS FOR BETTER COMMUNICATION

SUGESSITION FOR NEW DESIGNS TO REDUCE WASTAGES

BASIC ELEMENTS OF COST ENGINEERING:


THERE ARE 3 MAJOR COST ELEMNTS WHICH ARE AS FOLLOWS:
1.) DIRECT MATERIAL COST
2.) PROCESS COST
3.) OVER HEAD EXPENSES

DIRECT MATERIAL COST:


THE COST OF MATERIAL WHICH BECOME THE PART
OF THE PRODUCT MANUFACTURED, IS KNOWN AS DIRECT MATERIAL COST.THE
DIRECT MATERIAL IS THE FIRST ELEMENT OF COST & ITS COST IS A VERY
IMPORTANT FACTOR IN THE DETERMINATION OF PRIME COST.
MATERIAL COST IS DEFINED AS PRODUCT OF INPUT WEIGHT AND LANDED COST OF RAW
MATERIAL. INPUT WEIGHT IS SUM OF FINISH PRODUCT WEIGHT + MACHINING ALLOWANCE
WEIGHT + WASTAGES

TO CALCULATE THE DIRECT MATERIAL COST FOR A COMPONENT THE FOLLOWING


PROCEDURE SHOULD BE FOLLOWED:
1.) STUDY OF DRAWING: FIRST STEP IN CALCULATING THE COST OF THE
COMPONENT IS STUDY OF DRAWING WHICH GIVES INFORMATION ABOUT SHAPE OF
THE COMPONENT, MATERIAL GRADE USED, CATERORY, AREAS OF MACHINING,
TOLERENCES REQUIRED IN MACHINING AREAS, ETC.

2.) SPLIT UP: FOR CALCULATING THE WEIGHT SPLIT THE SHAPE IF THE COMPONENT
INTO STANDARD GEMOTRICAL SHAPES LIKE RECTANGLE, SQUARES, CIRCLES,
SEMI-CIRCLES, HEXAGONAL, CYLINDERS, ETC.

3.) CALCULATION OF VOLUME : AFTER GETTING SIMPLE SPLIT SHAPES CALCULATE


THE VOLUME OF THE SHAPES BY MULTIPLYING THE AREA WITH THE THICHNESS OF
THE COMPONENT
4.) CALCULATION OF FINISH WEIGHT WEIGHT: TO CALCULATE THE WEIGHT OF
THE COMPONENT THE VOLUME OBTAINED IS FURTHER MULTIPLY WITH THE
DENSITY OF THE MATERIAL. THE DENSITY VARIES WITH FERROUS GROUP e.g.
DENSITY OF THE CAST IRON = 7.25 g/cm3. DENSITY OF STEEL = 7.85 g/cm3. DENSITY
OF BRASS = 8.5 g/cm3, DENSITY OF LEAD BRONZE = 9.5g/cm3, ETC
5.) CALCULATION OF INPUT WEIGHT : AFTER GETTING THE FINISH WEIGHT OF THE
COMPONENT THERE IS ADDITION OF MACHINING ALLOWENCES & WASTAGE TO
CALCULATE THE INPUT WEIGHT OF THE COMPONENT.

6.) CALCULATION OF INPUT MATERIAL COST :

TO CALCULATE THE COST OF THE

INPUTMATERIAL, THE LANDED PRICE OF THE MATERIAL GRADE USED IN THE


COMPONENT IS MULTIPLY WITH THE INPUT WEIGHT.
7.) CALCULATION OF NET EFFECTIVE MATERIAL COST: FINISH MATERIAL COST &
WASTAGE IS FURTHER SUBTRACT FROM THE INPUT MATERIAL COST TO OBTAIN
THE NET EFFECTIVE MATERIAL COST. THE DIFFERENCE BETWEEN THE INPUT
WEIGHT & NET EFFECTIVE WEIGHT i.e. SCRAP WEIGHT HAVING SCRAP COST IS
DEDUCTED FROM THE NET EFFECTIVE MATERIAL COST

PROCESS COST:
LABOUR COST:
THE LABOUR ACTUALLY ENGAGED IN PERFORMING
THE MANUFACTURING OPERATION ON DIRECT MATERIAL FOR MAKING COMPLETE
FINISH PRODUCT IS CALLED DIRECT LABOUR & THE COST PAID TO THE DIRECT
LABOUR IS KNOWN AS DIRECT LABOUR COST.
DIRECT LABOUR COST PLAYS AN
IMPORTANT ROLE IN DRIVE THE TOTAL COST OF THE COMPONENT. SOMETIMES
LABOUR COST VARIES IT DEPENDS UPON THE COMPONENT. FOR EXAMPLE THE
DRIECT LABOUR COST IS MORE IN CASE IF THE COMPONENT IS PROCESSED ON A CNC
MACHINE THAN A CONVENTIONAL MACHINE.
LABOUR COST IS CONSEDRING IN MACHINE HOUR RATE. ADDITIONAL FULL / PARTIAL
LABOUR COST ALSO CONSIDERED WHEREEVER APPLICABLE e.g. 1-2 HELPER FOR 2-3
PRESSES, 1 ADDITIONAL HELP0ER FOR 2-3 CNC MACHINES.
TO CALCULATE PROCESS COST FOLLOWING FACTORS ARE CONSIDERED:
1.) MACHINE HOUR RATE
2.) OPERATION TIME
2 (A) MACHINING TIME
3.) SETTING TIME
4.) HANDLING TIME
4 (A) LOADING / UNLOADING TIME
4 (B) CHECKNG TIME
4 (C) ADVANCING / RETRACING TOOL TIME
5.) ALLOWENCES
5 (A) PERSONAL ALLOWENCE
5 (B) FATIGUE ALLOWENCE
5 (C) TOOL RESHARPNING / CHANGE TIME
6.) TOTAL TIME: CYCLE TIME = MACHINING TIME + SETTING TIME + HANDLING TIME +
ALLOWENCES

TERMS EFFECTING:
1. MACHINE HOUR RATE : CAPITAL COST , DEPRICATION COST , INTREST COST ,
LABOUR COST, CONSUMABLE COST, ELECTRICITY COST, SPARES COST, RENT.
2. MACHINING TIME: RPM, FEED, LENGTH OF CUT, DEPTH OF CUT, NO. OF CUTS.

BY MULTIPLYNING THE TOTAL MANUFACTURING TIME ON DIFFERENT MACHINES WITH


THEIR RESPECTIVE MACHINE HOUR RATE GIVES THE TOTAL MANUFACTURING COST
OF THE COMPONENT.

OVERHEAD EXPENSES:
ALL THE EXPENDITURE OVER & ABOVE DIRECT
MATERIAL & LABOUR ARE CALLED OVERHEAD EXPENSES. THESE ARE THE
UNAVOIDABLE EXPENSES WHICH ARE ESSENTIAL TO RUN THE FACTORY SMOOTHLY.
THESE EXPENSES MAY BE CATEGORISED AS UNDER:
1.) FACTORY EXPENSES : ALL EXPENDITURE DONE INSIDE THE FACTORY FOR
MANUFACTURING THE COMPONENT
2.) ADMINISTRATION EXPENSES : ALL EXPENDITURE DONE IN THE DIRECTION,
CONTROL, ADMINISTRATION OF A MANUFACTURING CONCERN.
3.) SELLING EXPENSES : ALL EXPENDITURE DONE IN SECURING ORDERS , FINDING OR
RETAINING MARKETS FOR PRODUCT.
4.) DISTRIBUTION EXPENSES : ALL EXPENDITURE DONE FOR DISTRIBUTON THE
PRODUCT IN THE MARKET.

HOW TOTAL COST OF COMPONENT DERIVES


DISCOUNT
PROFIT
SELLING
EXPENSES
ADMINISTATION
EXPENSES
FACTORY
EXPENSES
DIRECT LABOUR
COST +
DIRECT MATERIAL
COST +
DIRECT EXPENCES

PRIMARY
COST

FACTORY COST

PRODUCTI
ON COST

TOTAL
COST

SELLING
COST

MARKET
PRICE

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