Unit cost analysis

Essential and can be tackled in a variety of ways. There is no right way, but it must be done.
An agreed spreadsheet format ensures consistency and buy-in.

Description
Understanding the unit cost of a design is absolutely critical, and estimating unit cost is a
discipline which should be applied at all stages of a project. Before beginning a project, it is
necessary to make some ball-park estimations to support project justification. As concept
design progresses, it should be possible to refine predictions. Before full production
commences, the team should have a clear understanding of the likely unit cost.

Unit cost can be defined as the 'total manufacturing costs (over a period) divided by the
number of units produced'. This instantly raises the question of the time period which will be
taken into account when apportioning fixed costs, such as tooling and capital expenditure.
This could be considered in time (years, quarters) or maybe number of units.

In order to estimate costs, it also becomes critical to have a clear estimate of the anticipated
sales volumes, to assess the impacts of volume on cost of components.

A further complication could arise if tooling or equipment is to be used across product lines.
Thus, understanding unit costs demands a good understanding of the fixed and variable costs
incurred:

Fixed costs
Are incurred irrespective of production volumes, including production tooling, a
factory re-layout, additional production machinery, fixtures and jigs etc.
Variable costs
Increase relative to the number of units produced, and includes for example assembly
labour, machining time, purchased components and raw materials

The spreadsheet presented below encourages the design team to consider both the fixed and
the variable costs. This is useful when balancing the benefits of a complex single component
with expensive tooling but low unit cost versus several simpler parts with correspondingly
higher piece part costs, but significantly lower fixed costs.
While component and assembly costs can be estimated through a combination of experience,
common sense and direct supplier quotation, it can be difficult to apportion overhead costs
and this should be done in agreement with the finance department. It can also be a useful
exercise to encourage the production department to formally prepare an estimate for
individual component costs. Where there are a high number of parts, apply common sense
rules and address first the 20% of components which give rise to 80% of the costs.
Notes
Requires some experience and input from a range of departments, including
purchasing and finance
Unit cost should be available at all stages and should be viewed as an exercise in
improving the confidence of estimations