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Material Cost Analysis

Manufacturing adds value to material by converting the material from a received material into a deliverable product. About 50% of the cost of the product comes as expenses e penses of material that goes into the man fact re of manufacture the product. To estimate material cost, all these components should be gathered and costs acquiring them are put against them.

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Gaurav Gurjar
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97 views

Material Cost Analysis

Manufacturing adds value to material by converting the material from a received material into a deliverable product. About 50% of the cost of the product comes as expenses e penses of material that goes into the man fact re of manufacture the product. To estimate material cost, all these components should be gathered and costs acquiring them are put against them.

Uploaded by

Gaurav Gurjar
Copyright
© Attribution Non-Commercial (BY-NC)
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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Material cost analysis

Material cost analysis

Learning objectives of the topic


• Understand the importance of material cost estimation.
• Quantify the material usage in manufacturing
manufacturing.
• Estimate the direct material cost.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• In manufacturing, materials are the substance being
altered.
• Manufacturing adds value to material by converting the
material from a received material into a deliverable
prod ct
product.
• Materials are different for different manufacturing
p
processes:
– Sheet metals for oil can manufacturing
– CD drivers for PC assembly
– Fans for AC assembly

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• Material conversion processes include:
– Mixing,
Mixing combining
combining, separating
separating, refining
– Casting, molding
– Cutting,
g shaping,
p g forming g
– Changing properties
– Joining and assembling
– Cleaning, painting, coating, finishing
– Electronic fabrication
– packing
ki

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• Manufacturing resources (equipment, labor, capital, etc)
are consumed for the conversion of the purchased
p
material.
• About 50% of the cost of the product comes as
e penses of material that goes into the man
expenses manufacture
fact re of
the product.
• To approximate
pp the material cost for a new p
product,, it is
necessary to compare various designs and material
specifications, control material expenditure, and estimate
material requirements and costs
costs.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• Manufacturing involves changing the material to the
finished p
product,, so some amount of the startingg material
does not end up in the finished product.
• Hence, cost of all materials (in product or scrap) must be
assigned to the prod
product.
ct

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
Material cost

• Product design has to specify materials that are part of


the product.
p
• Items that become a part of the product are called direct
material.
• Indirect materials are used for processing but are not
part of the end product.
• In assembly operations
operations, materials or components are
acquired complete and ready for assembly.
• To estimate material cost, all these components should
be gathered and costs of acquiring them are put against
them.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• For products requiring material fabrication, the estimate
of materials should include allowances for waste and
losses.
• To determine the required raw material, two quantities of
material are in
involved:
ol ed
– The amount of raw material composing the design
– The amount of raw material lost due the
manufacturing process.
• The total amount of material required to manufactured
the part is
Ss = (Sf + Lw)×(1 + Ls + Lh)

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
SS = starting material
Sf = final material or material in the product
Lw = loss of material due to waste
Ls = loss of material due to scrap p (p
(percentage)
g )
Lh = loss of material due to shrinkage (percentage)

• Waste is the amount of material to be taken from the


starting material to arrive at the final product.
• Scrap allowance is the amount of material added to
compensate for errors caused by either human or
machine malfunction.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• A fabrication process produces a product that will be
q p
installed in a mechanical equipment.
• The volume of iron required in this product is 350 cm3.
• It is estimated that 75 cm3 of iron will be wasted by the
production process.
• From historical records, the production produces about
15% of parts that are scraped due to faulty production.
production
• Then, the amount of iron to start the production with is
) ( + 0.15)) = 488.75 cm3
Ss = ((350 + 75)×(1

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM
• The cost of material to manufacture a part is determined
from the amount of the starting g material.
• In manufacturing operations where there is salvage
(scrap and waste), the salvage can be sold or reused in
the process,
process which
hich will
ill make up
p for the material cost
cost.
• The direct material cost can be calculated as
Cdm
d = Ss Cms - Vs
Cms : cost of purchase of material (riyals per unit)
Vs : salvage
g ((riyals)
y )
• If there is a cost associated with the disposal of the
salvage, then Vs is negative.

Dr Muhammad Al‐Salamah, Industrial Engineering, KFUPM

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