IT-390 Product Estimating

1. IT-390 Product Estimating Ch 8

2. Cost of manufacturing, development & sales Profit Selling Price Contingencies Engineering Cost of goods manufactured General & Administrative Estimated Cost Overhead Costs Manufacturing Charges Indirect Materials Indirect Labor Direct Costs Operation Costs Price

3. Price • Two schools of thought • One - add all costs involved and profit to come up with a price • Use of a fixed mark-up on top of cost of goods • Job shops typically use this method

4. Price • Second - set a marketable price and back into it • What the market will bear VS what competitors charge - this is what is charged • Then improve to reduce costs for a profit • Highly competitive mature markets (cars)

5. Information Required for Product Estimating • Along with RFE (request for estimate): • 1. Engineering drawings (w /BOM) • 2. Due date for completion of estimate • 3. Quantity, rate of production, & schedule for production • 4. QC requirements • 5. Pack & ship instructions • 6. Marketing information

6. Financial Documents Required for Product Decision • Decision on whether to mfg. or not • Product estimate • Cash flow statement • Rat of return analysis Ch 4 • Profit & loss statement

7. Financial Documents Required for Product Decision • Cash flow statement - attempts to predict ability to meet future $ needed for project • Need price, quantity schedules, production costs, marketing & sales, costs, and capitalization costs • Table 9.4 (pg. 419).

8. Financial Documents Required for Product Decision • Rate-of-return analysis - method of product evaluation - profitability of product over its useful life • Lastly, prepare a projected profit & loss statement

9. Methods • Many ways to develop a product estimate • Two very popular methods: • Productive hour method • Learning method

10. Methods • Production hour method - oldest of the product-estimating methods (Table 7.6) (pg. 317) • Advantages • Combines machine hour rate with gross hourly rate • Factories with no direct labor can be handled by this method

11. Learning • Table 8.4 (pg. 371) • Cost elements are operation elements consisting of direct labor, direct material, and nonrecurring initial fixed costs

12. Learning • The estimate is made for the unit one - divided into fixed and variable portions • Direct labor and direct material are considered variable • Nonrecurring initial costs considered fixed • Learning slopes - estimated using historical evidence (liner regression) • The 150th cumulative factor - found using Appendix 5 or Eq. 6.10 (pg.259)

13. Learning • Each cost element total is found using the formula: • Cost Element Total = CF + CV · • Where • CF = cost element considered fixed, $s • CV = cost element considered variable $s • = cumulative factor • (cumulative avg. line assumed linear)

14. Learning • Costs totaled and then a plant overhead rate is applied • Sum of direct costs & plan overhead = Cost of goods manufactured • G & A (general & admin.) + selling costs + estimate of engineering costs are added next

15. Learning • All totals up to the final cost estimate • The learning method - required for major contractors working with US Government • Also used for low-quantity industrial products