10 Main Constituents of Cost Estimation

This article throws light upon the ten main constituents of cost estimation. The constituents are: 1. Design Period 2. Drafting Period 3. Time and Motion Studies 4. Product Planning and Production Control Time 5. Design and Development of Special Items 6. Experimental Work 7. Material Requirements and Costs 8. Labour and its Skill Required 9. Various Time Allowances 10. Overhead Expenses

Constituent # 1. Design Period:

It is the time required or consumed in developing and designing a particular product. Cost estimation work takes into consideration the wages and other expenses required to be paid for designing purpose.

Sometimes the cost for this purpose can be calculated or estimated on the basis of similar products already designed in the past. In case such data is not available judgement of a designer may be used for cost estimation purpose. Thus the remuneration paid to the design office workers and other expenses incurred during design of a particular product in a specific period are all added.

Constituent # 2. Drafting Period:

After the completion of development and design, the product assembly drawing is split up into simple parts and components and the drawings of individual components as per the production requirements are not prepared from drawing section.

The estimated time to be consumed by the drawing section in preparation of such drawings is known as “Drafting Period”. In order to calculate drafting time cost, the remuneration of draftsmen is taken as the basis.

Constituent # 3. Time and Motion Studies:

Normally sufficient time is consumed for these studies therefore an estimated time and then remuneration paid by such departments can be calculated. Sometimes past experience or judgement forms the basis of cost calculations.

Constituent # 4. Product Planning and Production Control Time:

These activities also consume sufficient time. Therefore estimated time and then cost to be incurred are calculated either by past experience or judgement.

Constituent # 5. Design and Development of Special Items:

Sometimes certain special purpose items are required in order to manufacture variety of goods or products. These special items may be tools jig fixtures, dies, cutters and special patterns. The estimator takes into consideration their cost for cost estimation purposes.

Constituent # 6. Experimental Work:

Normally experimentation help for development of best and cheapest methods of production. For this purpose researches and experimentation is done on old and present methods of production for comparison purposes.

Constituent # 7. Material Requirements and Costs:

The input materials required for production purposes are of two types:

(i) Direct Materials.

(ii) Indirect Materials.

Direct materials are those which become part of the product. So direct material is consumed in the manufacturing of a product. It can be measured and expenses charged directly to the cost of product.

Indirect materials are those which does not form the part of the final product but are essential for the production process.

The material cost is determined with the help of parts and components. These drawings indicate only the final dimensions of the product while the estimators calculate the total material requirements after giving due consideration to spoilage and other allowances involved.

An estimator first prepares rough drawings after considering various allowances and calculates the weight of material required. Thus material- cost is determined by knowing the market rates of materials.

While calculating material cost, it is essential to consider whether or not scrap resulting from the production process can be utilized for some other work of the plant. The resulting cost can then be subtracted from the earlier determined material cost.

Constituent # 8. Labour and its Skill Required:

Like input materials labour required for production process may be of following two types:

(i) Direct Labour.

(ii) Indirect Labour.

The direct labour is the labour directly employed in the manufacturing operation e.g. a turner, a fitter, a welder or a machinist.

Indirect labour is the labour which helps the productive labour in performing its duties e.g. maintenance men, material handling persons and storekeepers etc.

Cost estimation of labour is a complicated problem which requires sufficient experience and at the same time it plays vital role while estimating the total cost of a product. Therefore, for labour cost estimation, an estimator must be well conversant with the various operations carried out during the production process.

Thus in order to estimate labour cost he should have a thorough knowledge of the followings:

(i) Different machines to be utilized,

(ii) Different operations to be performed,

(iii) Wage rates of different types of labour employed,

(iv) Machine set up and operation times, and

(v) Different time allowances provided.

Constituent # 9. Various Time Allowances:

The Time Allowances can be classified as under:

(i) Set-up time,

(ii) Operation time,

(iii) Tear down time, and

(iv) Miscellaneous allowances.

(i) Set-up-Time:

This is the time required to set up the job or work piece and different tools on the machine. This is also called as “Setting Time”. It also includes time required to study blue prints or manufacturing drawings, to set and adjust machines, setting of gauges and to inspect job etc. Set up time depends on number of jobs to be manufactured.

(ii) Operation Time:

This is the time required by the machines to complete actual operations (e.g. turning, threading, drilling, boring etc.) on the work piece.

Operation time includes the following times:

(a) Handling Time,

(b) Machining Time.

(a) Handling Time:

It is the time consumed by worker or operator in physical movement while performing the machining operations and then disposing the work piece after the machining operation is over handling time is con­cerned with the loading and unloading of the job, jigs or fixtures or positioning of tools over the job etc.

(b) Machining Time:

It is the time required by the machines to complete an operation. It is the time from the start when the tool touches the work piece to the end when the tool leaves the work piece.

(iii) Tear-Down Time:

This time is counted form the instant the last element of operation has been completed. Tear down time is the time required for removal of tools, jig and fixtures as well as chips etc. left by the last operation from the machine.

(iv) Miscellaneous Allowances:

An estimator is supposed to consider various allowances for time because:

(A) A worker cannot work continuously without rest, his working efficiency decreases with lapse of time due to fatigue etc.

(B) Moreover time is required for other works such as tool changing for personal calls, sharpening to tools, checking measurements etc. These factors consume generally 10 to 15% of the total time taken.

Some of the miscellaneous allowances are as follows:

(a) Personal allowance.

(b) Fatigue allowance.

(c) Tool changing and grinding allowance.

(d) Measurement and checking allowance.

(e) Other allowances.

(a) Personal Allowances:

It is the time taken or allowed to a worker to attend to his personal needs such as to take water or coffee, to smoke; going to toilet etc. Decrease in worker’s efficiency due to cough; headache and other minor diseases also come in this category of allowances. This allowance is about 5% of the total working time.

(b) Fatigue Allowances:

Physical and mental work results in fatigue. Fatigue decreases the ability of a worker to work at same pace throughout the shift after sometime; he feels some tiredness may be due to long working period, poor lighting and ventilation and machine noises etc. Thus it may be concluded that a fresh worker can work more efficiently than a tired person. Fatigue allowance varies from 5 to 15% of the total time taken.

(c) Tool Changing and Grinding Allowances:

These allowances include the time required to remove the tool from its holder and to fix another tool in its place. Once the cutting tool stops functioning efficiently, it requires sharpening or replacement. For this purpose, worker has to remove the tool, go to the grinder to grind the tool, install back in its holder and adjust. This allowance may be taken about 5 to 10% depending upon the working conditions.

(d) Measurement and Checking Allowance:

Time is taken by worker for measuring and checking the dimensions of the product or component/part which he is producing. Rough dimensions need less time while accurate dimensions require more time. Therefore due consideration should be given to it. This allowance may be taken about 2 to 3% of the total time taken.

(e) Other Allowances:

Allowances have to be provided for activities like, periodic cleaning and oiling of machines getting stocks, removal of scrap and surplus stock etc. Due consideration has to be given to these activities while estimating time. These activities may consume 15 to 20% of the operation time.

Constituent # 10. Overhead Expenses:

Over-heads are the expenses which cannot be definitely charged to some particular head or product during the production process. All the expenses other than direct costs such as direct material, direct labour and any other direct expenses are known as overheads.

These may include the expenses such as:

(i) Indirect Material Cost:

In this case the cost of indirect materials such as water, lubricating oils, coolants, power and cotton waste etc. are considered.

(ii) Indirect Labour Cost:

In this case the wages of workers/officials indirectly involved in the process of production (such as supervisors, chowkidars, helpers, designers, draftsmen and material handlers) are considered.

(iii) Administrative Overheads:

These include the wages of administrative staff working in offices, telephone, telegraph and postage charges etc.

(iv) Repair and maintenance costs.

(v) Depreciation and insurance charges of buildings, plants, furniture and equipment etc. Other expenses if any are also added in overhead expenses.

Submitted by : Dr. Arushi, Category : Cost Estimation, Tag : Constituents of Cost Estimation