WELDING ECONOMICS AND MANAGEMENT

WFC 212
Economics
Economics is the theories, principles, and models that deal with how the market process works. It
attempts to explain how wealth is created and distributed in communities, how people allocate resources
that are scarce and have many alternative uses, and other such matters that arise in dealing with human
wants and their satisfaction.
Management
Management is the organization and coordination of the activities of a business in order to achieve
defined objectives.
Management is often included as a factor of production along with machines, materials, and money.
Importance of Effective Costing
Costing
Costing is system of computing cost of production or of running a business, by allocating expenditure to
various stages of production or to different operations of a firm.
An amount paid or required in payment for a purchase; a price.
The expenditure of something, such as time or labor, necessary for the attainment of a goal.

COSTING METHODS (MANUFACTURING)

Manufacturing costing methods are accounting techniques that are used to help understand the value of
inputs and outputs in a production process. By tracking and categorizing this information according to a
rigorous accounting system, corporate management can determine with a high degree of accuracy the
cost per unit of production and other key performance indicators (KPI). Management needs this
information in order to make informed decisions about production levels, pricing, competitive strategy,
future investment, and a host of other concerns. Such information is primarily necessary for internal use,
or managerial accounting.
OVERVIEW OF CURRENT METHODS
PROCESS AND JOB-ORDER COSTING.
There are two conventional costing approaches used in manufacturing. They are: Process costing and Job-
order costing.
Process costing - is used in most mass-production settings. It is a process cost system that analyzes the
net cost of a manufacturing process e.g. filling bottles with soda, over a specified period of time. The unit
cost for filling bottles is simply the net costs incurred while filling all the bottles during the period divided
by the number of bottles filled. Since most manufacturing processes involve more than one step, a similar
calculation is made for each step to arrive at a unit cost average for the entire production system.
Job-order costing - is concerned with tracking all the costs on an individual product basis. This is useful in
settings where each unit of production is customized or where there are very few units produced, such as
in building pianos, ships, or airplanes. Under job order costing, the exact costs incurred in the production
of a particular unit are recorded and are not necessarily averaged with those of any other unit, since every
unit may be different. Job-order costing is also widely used outside manufacturing.
A single manufacturer may use both process costing and job-order costing for different parts of its
operations.
ACTIVITY-BASED COSTING.
Activity-based costing (ABC) is a secondary and somewhat complementary (or better, supplementary)
method to the two traditional costing techniques. Whereas traditional methods might classify costs in
generic categories like direct materials, labor, and other overhead, ABC clusters all the costs associated
with a single manufacturing task, regardless of whether they fall under the headings of labor or materials
or something else. So in the bottling example activity-based costs might include operating the dispensing
machines, performing quality checks, moving pallets of bottles, and so forth. Each of these activities may
involve human labor, equipment costs, energy and expendable resources, and materials, but for analytic
purposes the costs are all lumped together under a single activity concept. The advantage of this approach
is that management can then observe which tasks cost the most versus which add the most value; this
analysis may indicate that a disproportionate amount of money is being spent on low-value activities,
signaling a need for process changes or for outsourcing to a vendor that can perform the tasks less
expensively. Use of this method is sometimes referred to as activity-based cost management (ABCM) or
simply activity-based management (ABM).
TYPES OF COST ACCOUNTING.
Financial accounting addresses issues relating to a firm's daily financial transactions, as well as overall
profitability. For example, derivation of operating ratios in relation to absolute quantities of profit and
loss to business volume.
Capital accounting addresses issues relating to the valuation of a firm's capital goods. This was particularly
important in the heavy industries given the unprecedented quantities of capital involved and the problem
of how to account for the repair and renewal of capital.
Innovations in cost accounting followed those in financial and capital accounting.
Cost accounting involves the determination and comparison of costs among a firm's divisions or
operations. Thus the historical development of cost accounting accommodated the development of the
multidivisional firm towards the end of the 19th century.
There was necessarily a considerable amount of overlap among financial, capital, and cost accounting. For
example, to accurately determine unit costs, it was necessary to relate overhead costs and capital
depreciation to the volume of production. At the same time, unit costs were typically used to determine
prices, which in turn affected financial accounts. The separation of these types of accounting followed
their historical institutional separation. That is, until the innovations of E.I. Du Pont de Nemours & Co. in
the 20th century, financial, capital, and cost accounting operations were carried out in relative autonomy
within firms.
THE BASICS OF COSTING METHODS
FIXED COSTS.
One of the key issues in conventional costing methods (i.e., process costing and job-order costing) is
distinguishing among types of costs. A basic distinction is made between fixed and variable costs.
Fixed costs are those costs that are invariant (constant) with respect to changes in output and would
accrue even if no output were produced. Such costs might include interest payments on the purchase of
plant and equipment, rent, property taxes, and executive salaries. The notion of fixed costs is restricted
within a certain time frame, since over the long run fixed costs can vary. For example, a manufacturer may
decide to expand capacity in the face of increased demand for its product, requiring a higher level of
expenditure on plant and equipment.
Variable costs change proportionately to the level of output. For manufacturers, a key variable cost is the
cost of materials. In terms of total costs at increasing output levels, fixed costs are constant and variable
costs are increasing at a constant rate. In terms of unit costs at increasing output levels, fixed costs are
declining, and variable costs constant. Manufacturers are vitally interested in unit costs with respect to
changes in output levels, since this determines profit per unit of output at any given price level. The
characteristics of fixed and variable costs indicates that as output increases, unit costs will decline, since
there is constant variable cost and lesser fixed cost embodied in each unit. These costing methods thus
suggest that it is in manufacturers' interest to run, within the limits of plant design, at high capacity levels.
DIRECT COSTS.
Costing methods distinguish between the direct and indirect costs of any costed object. Direct costs are
those costs readily traceable to the costed object, whereas indirect costs are less-readily traceable. Direct
costs typically include the major components of any manufactured good and the labor directly required
to produce that good. Direct costs are often subdivided into direct material costs and direct labor costs.
Direct costs are also referred to as prime costs.
INDIRECT COSTS.
Indirect costs include plant-wide costs such as those resulting from the use of energy and fixed capital,
but indirect costs may also include the costs of minor components such as solder or glue. While all costs
are conceivably traceable to a costed object, the determination of whether to do so depends on the cost-
effectiveness with which this can be done. Indirect costs of all kinds are sometimes referred to as
overhead, and in this sense prime costs can be distinguished from overhead costs.
ESTIMATING TOTAL COSTS
Several methods are used in manufacturing to estimate total cost equations, in which total costs are
determined as a function of fixed costs per time period, variable costs per unit of output, and the level of
output. These methods include account analysis, the engineering approach, the high-low approach, and
linear regression analysis. In all these methods, the central issue is how total costs change in relation to
changes in output.
ACCOUNT ANALYSIS.
In account analysis, all costs are classified as either strictly fixed or variable. This has the advantage of
ease of computation. However, some costs may be semi-variable costs or step costs. Utility bills are
typically semi-variable in that they contain fixed and variable components. Step costs increase in discrete
jumps as the level of output increases. In account analysis, such costs are typically categorized as either
fixed or variable depending which element predominates. Thus, the accuracy of account analysis depends
in large part on the proportion of costs that are not strictly fixed or variable. For many manufacturing
firms, account analysis provides a sufficiently accurate estimation of total costs over a range of output
levels.
ENGINEERING APPROACH.
The engineering approach infers costs from the specifications of a product. The approach works best for
determining direct material costs and less well for direct labor costs and overhead costs. The advantage
of the engineering approach is that it enables manufacturers to estimate what a product would cost
without having previously produced that product, whereas the other methods are based on the costs of
production that has already occurred.
HIGH-LOW APPROACH.
In the high-low approach, a firm must know its total costs for previous high and low levels of output.
Graphing total costs against output, total costs over a range of output are estimated by fitting a straight
line through total cost points at high and low levels of output. If changes in total costs can be accurately
described as a linear function of output, then the slope of the line indicates changes in variable costs. The
problem with the high-low approach is that the two data points may not, for whatever reasons, accurately
represent the underlying total cost-output relationship. That is, if additional total cost-output points were
plotted, they might lay significantly wide of the line connecting the two initial high-low points.
LINEAR REGRESSION.
Linear regression analysis addresses the shortcomings of the high low approach by fitting a line through
all total cost-output points. The line is fitted to minimize the sum of squared differences between total
cost-output points and the line itself, in standard linear regression fashion. The drawback of this approach
is that it requires more data points than the other approaches.
STANDARD COSTS
The relation of total costs to output levels is combined in the idea of standard costs. Standard costs are
estimates of unit costs at targeted output levels, including direct materials costs, direct labor costs, and
indirect costs. Standard costs are used to prepare budgets for planned production and to assess
production that has occurred. The estimation of standard costs requires the separate estimation of
standards for direct materials, direct labor, and overhead.
DIRECT MATERIALS.
Direct material standards are the easiest to estimate. Costs are determined from the prices of all
necessary material inputs into the product, plus sales tax, shipping, and other related costs. Unanticipated
price changes complicate this otherwise straightforward process. Since standard costs are a measure of
unit costs, it is also necessary to determine the quantity of materials per unit. This can be done using an
engineering approach.
DIRECT LABOR.
Direct labor standards are somewhat more difficult to estimate. The determination of costs must account
for wages, though if workers in a production process are earning different wages, it is necessary to
estimate a weighted average (adjust statistically) of wage costs. The cost of benefits, employment related
taxes, and overtime pay must also be accounted for. As with direct material standards, the quantity of
direct labor required to produce a unit of output can be estimated with an engineering approach. Average
set-up time and downtime must also be included in the estimation. Many union contracts codify labor
time standards, which can make budgeting easier.
OVERHEAD.
Overhead standards are the most difficult to estimate, and they are typically accounted for in an
approximate manner. The problem of accounting for overhead costs per unit of output was noted above—
it is often difficult to trace indirect costs to a particular product. The problem is made more complicated
if these costs are highly centralized within a plant and if multiple products are produced within a plant.
Overhead standards are typically estimated by taking total overhead costs and relating them to a more
readily-knowable measure, such as direct labor hours, direct labor costs, or machine hours used. Direct
labor hours was traditionally the most widely-used measure for determining overhead standards, but the
growth of automated plants resulted in a shift to machine hours used.
DETERMINING PROFITABILITY THROUGH
CVP ANALYSIS
Cost equations are combined with revenue equations to determine profitability at different levels of
output. This is referred to as cost-volume-profit (CVP) analysis. That is, net income equals total revenue
minus total cost; total cost, as noted above, equals average variable cost times the quantity of output plus
fixed cost; and total revenue equals price times the quantity of output sold.
Combining cost and revenue equations reveals that net income equals price times quantity of output sold
minus average variable cost times the quantity of output minus fixed costs. That is,

where P = price,
Q = quantity of output,
AVC = average variable cost
FC = fixed costs
This is referred to as the cost-volume-profit equation, and is one of the most widely-used of cost
accounting tools.
CVP analysis allows a firm to determine a breakeven point, the level of output at which total revenue
equals total cost. That total cost and total revenue functions will be equal at some nonzero level of output
is assured by the fact that at zero units of output, total costs will be positive as a result of fixed costs and
total revenues will be zero. This is based on the assumption that the unit price for which a product can be
sold is greater than the unit cost, so that total revenue increases faster than total cost as output increases.
In addition to estimating profitability across a range of output levels, firms use CVP analysis to determine
whether projected sales are sufficiently beyond the breakeven point to warrant production.
Economic theory also concerns itself with changing costs as a function of changing output within a given
plant. This is an analog to the slope of an accountant's cost function curve and is referred to as marginal
cost. In his essay, "Economic Concepts in Cost Accounting," Shilling law describes the relationship between
mainstream economic theory and cost accounting as follows: "Cost accounting springs mainly from the
needs of managers and others to make decisions affecting the allocation of economic resources. This
might suggest that cost accounting is based directly on a fairly well-defined set of concepts drawn from
economic theory. The truth is something else.… The uneasy and ambiguous relationship between cost
accounting and economics is nowhere more apparent than in the application of the concept of short-run
marginal cost." In mainstream economic theory, marginal costs are generally assumed to be decreasing
at lower levels of output, more or less flat over medium levels, and increasing at an accelerating rate at
higher levels. As noted above, cost accountants generally base their calculations on the assumption that
costs change at a constant rate with respect to output.
FUTURE OF COST ACCOUNTING
EXPANSION AND INTEGRATION OF ABC.
Widespread corporate interest in activity-based costing (ABC), which started in the late 1980s and has
continued through the late 1990s, has created dueling cost accounting systems for some companies.
Managers want the analytic power of an ABC system, yet may also require some of the conventional
abilities and rigor of a traditional system like process or job costing. The failure to integrate these
competing needs has caused some firms to abandon or at least reconsider ABC initiatives, which can be
expensive and time-consuming to implement in a large operation. Some managers have viewed it as an
either-or dilemma, and often ABC is eyed with some suspicion, as indeed early formulations of it were not
effective substitutes for conventional costing methods. However, many successful ABC implementations
use it as a supplement to, rather than a replacement for, standard methods. Advocates of ABC have begun
to formulate ways in which ABC can be better integrated with conventional methods so that companies
can enjoy the benefits of both. In 1999 the Institute of Management Accountants (IMA), the leading
professional organization for managerial accountants, published renewed guidelines for companies
wishing to implement ABC practices, following a series of previous statements on using ABC dating back
to the early 1990s. The IMA's statements included a number of cautions against potential pitfalls in
establishing an ABC system.
TARGET COSTING.
A related practice that has also enjoyed quite a bit of attention since the mid-1990s is target costing, which
is a method of engineering a product and its manufacturing process from the start with a specific cost
model in mind. This approach, which is essentially an elaboration of the engineering costing approach,
attempts to create an optimally efficient process from the start—with a profitable yet marketable selling
price in mind—rather than waiting until a product is already being manufactured and then setting prices
and looking for cost savings. Some implementations of target costing actually don't involve accountants
as much as they involve product marketing managers, engineers, and others who are part of the actual
design and production processes. IMA guid
elines also exist for target costing systems.
Effective Costing
Profit
The surplus remaining after total costs are deducted from total revenue, and the basis on which tax is
computed and dividend is paid. It is the best known measure of success in an enterprise.
Profit is reflected in reduction in liabilities, increase in assets, and/or increase in owners' equity. It
furnishes resources for investing in future operations, and its absence may result in the extinction of a
company. As an indicator of comparative performance, however, it is less valuable than return on
investment (ROI). Also called earnings, gain, or income.
Workers Bonus
Gratuity given as gift, or compensation earned as reward upon achieving a goal or milestone.
Finding ways to motivate your team to be hardworking and productive is one of the biggest challenges
managers face. If you are a manager or supervisor who supplies bonuses to your employees, or are
considering introducing the bonus scheme into the workplace, check out the advantages and
disadvantages below of supplying bonuses.
Advantages of supplying bonuses:
1 Incentive and motivation
Bonus payments to employees give them the incentive to work hard and be motivated. If you give out
bonuses at a specific time of the year, then employees will have something to work towards. For example
some businesses supply bonuses per quarter, meaning that the employee has an incentive to work
towards as the year progresses.
2 Appreciation
Employees who receive regular bonus payments feel far more appreciated than those that do not. When
supplying bonuses, you should focus on what the individual has achieved within the past quarter, as this
will encourage them further as each month passes.
Disadvantages of supplying bonuses:
1 Costly for company
Although the amount supplied is optional, when distributed amongst all employees, it can end up costing
the company a great deal of money, whether the amount is supplied on a quarterly or annual basis.
Companies may wish to consider supplying gift cards or other gifts as bonuses, rather than using cash.

2 Jealousy
Bonuses are intended to reflect how well an employee has done within their workload; therefore the
amount that you supply may vary from one employee to the next. However, employees aren’t hesitant to
talk amongst one another; and once one finds out that the other received more, tensions may rise, and
people may become jealous. This could result in more problems than benefits.
Every case will be different for justifying the awarding of a bonus to an employee. Just make sure to
consider the factors above so it is performed in a fair manner.

Replacement of Equipment
The manufacturing activities use various types of machines and equipment in their production processes.
Such machines and equipment require huge investments and they enjoy relatively longer physical life. The
expired costs of such investments are considered in the form of depreciation while ascertaining the unit
cost of the production.
All machines and equipment are not merely subject to wear and tear which is adjusted in the form of
depreciation, but they are also exposed to the risk of obsolescence. A machine becomes obsolete when it
becomes valueless through the introduction of a new machine or new method in the market. Due to
continued technological development, the obsolescence may occur at any time, even few months after
the installation of a new machine.
Thus, at any point of time the existing equipment is put on the defensive fronts. They are compelled to
justify their tenure of existence against the challenges of newly developed modern machines or methods.
In the modern competitive world with continued technological developments, the replacement of
machines and equipment has emerged as a continuous and complex problem. For tapping the cost
advantages with a view to strengthen the competitive abilities, the replacements and transformation of
the installed capacities assumes the strategic role in the modern manufacturing management.
It should be noted that if any existing equipment fails to meet the challenges made by the advancement
of the technologies, it must be replaced irrespective of its age or operating conditions. Thus, even if
equipment has a physical value (i.e. it is not worn out), it should be discarded if it looses its economic
value, measured in terms of the competitive advantage.
It is not always practical to discard the existing machines and equipment because the existing installed
capacity always lags behind the best machine or technique available in the market at any point of time.
The replacement analysis does not strive to eliminate such lagging, but it attempts to keep it at the lowest
that are economically justifiable.
Reasons for equipment replacement:
The factors necessitating the replacement of machines and equipment can broadly be classified into the
following two categories:
1. Technical factors.
2. Cost factors

Technical factors
1. Wear and tear of equipment
2. Obsolescence caused by new invention.
3. Unsuitability of existing equipment due to:
(a) Size of the work
(b) Speed of operation
(c) Degree of accuracy
(d) Rate of output
(e) Need for power

4. Automation combining two or more processes

5. To eliminate the slack time of some machines through line balancing.
6. Reduced safety as compared to new equipment.
7. Additional operations by the new machine.
8. Reduction or elimination of manual operation and the resultant hazards by the new machine.
9. Easy, quick and convenient setting-up and operation of new machine
10. Reliability of performance

Cost Factors
1. High repair cost of existing machine
2. Reduction in the spoiled work by the new machine.
3. More output at faster rate from new machine.
4. Combination of two or more existing operations into one by a new machine.
5. Reduction in the labor cost caused by the reduced number and lower type of operators.
6. Consumption of less power or fuel by the new machine.
7. Lesser space required by the new machine.
8. Improvement in the quality with the use of new machine.
9. Flexibility in the use of the new machine for other types of operations.
10. Probable economic life of the new machine.
11. Reduction in the cost of jigs, tools, fixtures, etc by the use of new machine.
12. Size of the investment required in new machine.
It should be noted that there are certain intangible factors which are incidental to equipment
replacement. They are:

(a) Displacement of employees caused by replacements.

(b) Introduction of Hazards by new equipment.
Being intangible factors they are not measured in monetary value and hence are not included in the
replacement analysis. They involve sociological and humanitarian considerations with far reaching
influences.
A careful consideration based on the above factors must be made before implementing equipment
replacement. It is prudent to defer replacement if the information is on cards that advanced model of the
same machine is developed and is available in the very near future. This enables the replacement by state
of the art version of the machine and the replacement is more justified for the capital invested.
UNDERSTANDING ORGANIZATIONAL GROWTH
Understanding organizational growth is a key factor in profit maximization and organizational relevance.
Growth means enlargement, increase and expansion. Organizational growth is something for which most
companies, large or small, strive for. Small firms want to get big, big firms want to get bigger.
Organizational growth, however, means different things to different organizations.
Certainly, for an organization to grow the managers, CEO's and Managing directors must understand how
growth is defined, how it is achieved, how to cope with the different challenges that comes with
organizational growth, how to identify the factors that hinders growth, how to measure organizational
growth, and also to comprehend the phases of organizational growth.
PHASES OF ORGANIZATIONAL GROWTH
Understanding the various unique phases of organizational growth will not only enable you to evaluate
your current position in the growth circle, but it will also enable you to effectively and efficiently equip
yourself with the appropriate knowledge of how to explore your potentials for maximum utilization.
Larry E. Greiner is a management and organization professor at the University of Southern California. His
contribution has really brought tremendous changes to the field of management Science. In his 1998
Harvard Business Review article entitled "Evolution and Revolution as Organizations Grow," he outlined
five phases of growth interrupted by what he termed "revolutions" that shook up the status quo and
ushered in the successive stage. Based on observations of historical company patterns, he outlined the
phases of organizational growth as follows:
1. Creative phase: This is the first phase of organizational growth. This is the phase where the company
or organization concentrates all their efforts in creating products and following it up with efforts to reach
the targeted markets. When a company or subunit of a company is first formed, most attention and
activity is focused on developing a product and reaching its market.
2. Direction phase: This is the second phase of organizational growth. As the company begins to develop
more products and capture large portions of the targeted markets, she begins to formalize business
management methods and "professionalize" its practices, and this usually include centralizing power in
the organization.
3. Delegation phase: This is the third phase of organizational growth. This is evidenced when
centralization begins to prove weighty. When centralization proves too cumbersome for a large
organization, it begins to delegate power and decision-making in various ways, such as by creating semi-
autonomous business units/divisions and moving the reward/risk paradigm down to lower level managers
and employees in general. Any company who fails to embrace the phase of delegation will never grow,
and the longer they remain in this condition, the sooner their extinction will become inevitable.
4. Coordination phase: This is the fourth phase of organizational growth. Coordination is needed when
decentralization becomes excessive or inefficient. In this phase, management attempts to rein in the
organization by merging or coordinating the activities of various fragmented parts of the company,
demanding more accountability and creating unifying incentives such as profit sharing.
5. Collaboration phase: This is the fifth phase of organizational growth. This is introduced where there
is too much evidence of bureaucratic and inflexible efforts. When central coordination efforts prove
bureaucratic and inflexible, management adopts a team-based, cross-functional structure and more fluid
policies that empower workers and promote dialog, experimentation, and negotiation.
6. Extra-Organizational Solutions Phase. Greiner's recently added sixth phase suggests that growth may
continue through merger, outsourcing, networks and other solutions involving other companies. Growth
rates will vary between and even within phases. The duration of each phase depends almost totally on
the rate of growth of the market in which the organization operates. The longer a phase lasts, though, the
harder it will be to implement a transition.

In view of the above, it is becomes pertinently clear that many organization refuse to grow because at
certain stages management lacks the able-ness and or willingness to shift its organizational paradigm.
When certain individuals at the top are reluctant to give up power once it's in their hands organizational
inactivity and frustration is eventual manifested.
MEASURING ORGANIZATIONAL GROWTH
There are various methods used to measure organizational growth. In addition to such qualitative notions
of organizational growth, there are many more tangible parameters a company can select to measure its
growth. The most meaningful yardstick is one that shows progress with respect to its stated goals. Number
of employees: Some businesspeople boast of the number of employees in their companies or
departments. However, the quantity of employees in the company does not produce a good yardstick to
say the organization is growing. This is because quantity does not mean quality. It is the quantity of quality
employee in an organization that determines the growth of that organization. This is because their
contribution to growth of the organization is evidenced in their creative and innovative products. To hire
quality employees, however, cost money. A better employee-based measure of growth is change in
company or departmental revenue or profit generated per employee. This becomes a valuable measure
of increasing (or decreasing) productivity, rather than a measure of labor and salary expense.
Revenue: A company is described by its revenues as an "X million dollar company." Although this is
probably the most commonly cited measure of corporate growth, it should not be tied to gross revenue
or gross margin. It is an error to measure the growth of an organization based on its gross revenue or
gross margins. The danger of relying on gross revenue or gross margin as a measure of growth for an
organization is that it completely ignores the expenses associated with generating those revenues.
Greater revenues do not necessarily mean greater profitability. In periods of very quick "growth,"
expenses can twirl upward and out of control leaving a company strapped for cash and facing an uncertain
future, at best.
More useful, revenue-based measures of growth are increases (or decreases) in net profit or net margins.
These methods account for the expenses incurred in generating revenues for the firm and identify the
portion that is truly added to the bottom line. Special analyses of profit margins should include calculating
the return on investment (ROI), either for the company as a whole or for individual units or product lines.
Return On Investment tells management whether the profits being generated are enough to compensate
for the opportunity costs, the risks, and the time value of the money that the company has invested to
produce those profits. A related metric is return on assets (ROA), which evaluates profits against the value
of all the assets (capital, plant, equipment, etc.) the company has channeled into generating its income.
For many companies, especially publicly held ones, the ultimate measure of growth is the creation of
wealth for owners/investors. While net profits are an indication of wealth creation, companies (or their
observers) may scrutinize their finances further to determine whether they are actually generating an
economic profit, or a profit that exceeds the implicit cost of the capital invested in them. The company
may be said to create new wealth after the cost of capital is met.
Market Value Added: The growth of an organization is measure by the degree of market value it has
added. This is a more direct measure of shareholder wealth creation. In terms of other competitors
position and influence, where a company stands, the market share it has play a pragmatic yardstick for
measuring its growth.
In conclusion, it is strongly stressed that understanding organizational growth is a fundamental
requirement for organization relevance and profit maximization. When management is armed with this
knowledge the sky becomes a starting point for the creation of profitable business empire.
DEPRECIATION
For accounting purposes, depreciation indicates how much of an asset's value has been used up.
Depreciation is used in accounting to try to match the expense of an asset to the income that the asset
helps the company earn. For example, if a company buys a piece of equipment for N1 million and
expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year,
the company will expense N100,000 (assuming straight-line depreciation), which will be matched with
the money that the equipment helps to make each year.

Determining the Cost of Welding

Can it be that most companies using welding technology have never thoroughly evaluated their welding
costs? Or that they have never analyzed the contribution of welding to their over-all manufacturing
process?
According to a recent study published jointly by the American Welding Society (AWS) and the Edison
Welding Institute (EWI), the answer is "yes." The report further states that with regard to welding, most
manufacturers lack an understanding of how much they are spending, what they are spending it on, or
why. The good news is, the same study found that companies with a good understanding of welding
economics and the value added by the technology can and do compete successfully in domestic and
global markets.
Peter Drucker said "If you can't measure it, you can't manage it." An obvious corollary is that if you're
not measuring it, you're not managing it. In a nutshell, that's the message of the AWS/EWI study. That
most companies in the metals fabrication business are not even looking at welding costs, let alone
managing them.
At this stage, the fundamentals of welding cost determination will be examined. We shall also explore
the implications of which cost system is used, including the consequences of selecting the wrong
method.
Reasons for Determining Welding Costs
Knowing which factors affect welding costs can enable a company
1. To focus its energies on changes that will reduce costs, enabling the business improve its
competitiveness and profitability.
2. An accurate cost model can permit comparisons of manufacturing options (for example,
comparing the effect of a change of welding processes on overall costs).
3. A correct cost model will permit the estimation of savings that will accrue with automation, so
that the projected savings can be used to justify the automation capital investment.
Factors Affecting Welding Costs.
What should be considered when determining welding costs?
In reality, every operation resulting from the decision to weld can be legitimately charged to weld
fabrication. The greater the number of factors considered when calculating welding costs, the more
accurate the results will be. Also, considering all the relevant factors increases the opportunities for cost
reduction. When determining whether a specific manufacturing cost should be charged to welding, it is
helpful to ask: Would this cost be incurred if the product wasn't welded?
When this question is objectively answered, then all of the following factors may be considered to be
part of the cost of welding:
 Time for joint preparation.
 Time to prepare the material for welding (blasting, removal of oils, etc.).
 Time for assembly.
  Time to preheat the joint (when required).
 Time for tack-up.
 Time for positioning.
 Time for welding.
 Time to remove slag (when applicable).
 Time to remove spatter.
 Time for inspection.
 Time for changing electrodes.
 Time to move the welder from one location to another.
 Time to change welding machine settings.
 Time spent by personnel for personal purposes.
 Time to repair or re-work defective welds.
 Costs associated with any required stress relief.
 Cost of electrodes.
 Cost of shielding materials.
 Cost of electric power.
 Cost of fuel gas for pre-heat (when required).
Time — the Biggest Cost
Of the 20 items identified in the preceding list, 15 begin with the word "time." Unless the application
requires unusually expensive alloys, or is a highly automated operation, the time associated with
welding operations and the wages that must be paid to skilled personnel will typically dominate welding
costs.
Simplified Cost Models.
Two different approaches may be used to determine welding costs: complex and simple. There are the
complex, computer-based models that attempt to capture every contributing factor; and there are
simplified models. Both have inadequacies, but are useful nevertheless. Only the simplified models will
be discussed here.
In the simplified models, welding costs are estimated based upon:
 Labor and overhead. (L&O)
 Cost of welding consumables and shielding materials.
In most cases, the cost of power is highly varied and accordingly ignored. A variety of costs are often
attributed to "overhead," including plant and equipment, supervision, indirect labor, etc. These are
significant costs, often exceeding direct labor costs by a factor of 2 - 4 times. A simplifying assumption is
to tie an overhead factor to the direct labor cost. Thus, a single cost per hour is used for "labor and
overhead" (L&O) in simplified models.
The basic cost-estimating formulas, therefore, will take on the form of: Welding Costs = (L&O) +
(Consumables Costs)
The Operating Factor
A review of the cost factors listed previously reveals there are various "times" listed other than the time
required for welding. Any time the welder's arc is not struck represents time that the joining process is
not progressing. Since the total hours worked are always more than the total hours spent welding, the
ratio of hours spent welding to total hours worked is called the operating factor.
As the basis of any cost formula, it must be determined accurately. Since arc time is always divided by a
larger number, the ratio is always less than 1.0, and therefore a decimal. For convenience in referring to
operating factors, the ratio is multiplied by 100 and expressed as a percentage. Thus, one hears
references to operating factors of 30, 40 or 50 percent. When using an operating factor in a cost
formula, however, it must be given in the decimal form, so that a 40% operating factor would be
expressed as 0.40 in a cost formula.
Three Basic Approaches.
Welding costs can be estimated using one of three basic approaches:
 Cost per unit.
 Cost per length.
 Cost per weight.
The application will determine which approach is most appropriate.
One caveat (proviso or warning): with any of the cost calculation methods, it is critical that the variables
used result in an equation that is dimensionally correct. For example, if the wire feed speed is measured
in inches per minute, and it is multiplied by the weight of the electrode per length, the weight per length
must be in units of pounds per inch. If this is done, the resultant product will be pounds per minute.
However, if the weight is measured in pounds per foot, the resultant product would be inch-pounds per
foot-minutes. Obviously, this is a meaningless dimension. It can be corrected, however, by multiplying
the product by "1 foot/12 inches," returning the dimensions to pounds per minute, and correcting the
numerical value by a factor of 12.
Cost Per Unit.

Weldments that move through a work cell and that may require a number of small, short welds, are
ideal applications for using the cost per unit method.

The cost per unit method is most effective when the application involves pieces that move through a
workstation. The types and sizes of the welds are immaterial with this method — fillet welds, groove
welds, plug welds, etc., can all be combined when the cost per unit is determined, since time (the most
costly aspect of welding) is measured directly.
This makes the per unit method the most accurate of the three approaches. It measures the key cost
variable directly, and does not require the use of the operating factor variable. If the process involves
wire fed electrode, it is easy to find the cost of the welding materials.
The cost per unit of production, in Naira per unit, can be estimated using the following formulas:
Cost/unit = (L&O/unit) + (filler metal and shielding material cost/unit)
L&O/unit = (welding-related time/unit) x (L&O rate)
For wire fed processes:
Filler metal cost/unit = (wire feed speed) x (welding time) x (weight of electrode/inch) x (electrode
cost/pound)
Filler metal cost (SMAW) = [{(electrode melt off rate) x (welding time) x (weight of electrode/inch)}/(% of
electrode used)]
Shielding gas cost/piece = (flow rate) x (welding time) x (gas cost/ft. 3)
SAW flux cost/piece = (wt. of flux used) x (cost of flux/lb.)
Cost Per Length

Long single-pass fillet welds join the stiffeners to the web, and the web to the flanges, on this bridge
girder. This makes the cost per length method appropriate for this application.

This method, appropriate for estimating the cost of long welds, is best applied to single pass welds of a
prescribed size. The values determined by this method will differ for welds of different sizes. The
important variable of time is captured through measurement of travel speed (ft. /unit of time). Though
good for single pass welds, the method is harder to use for multi-pass welds. These formulas can be
used to estimate the cost per length:
Cost/length = (L&O cost/length) + (filler metal and shielding cost/length)
L&O cost/length = (L&O rate)/(travel speed)(operating factor)
Filler metal cost/length (wire fed processes) = {(wire feed speed) x (wt. of electrode/in.) x (cost of
electrode/lb.)}/(travel speed)
Filler metal cost/length (SMAW) = (melt off rate) x (wt. of electrode/length) x (cost of
electrode/lb.)/(travel speed)(% of electrode used)
Shielding gas cost/length = (gas flow rate) x (gas cost/ft. 3)/(travel speed)
Shielding cost/length (flux) = (wt. of weld metal/length) x (ratio of flux to weld metal) x (cost of flux/lb.)
Cost per weight

Hardfacing applications requiring significant quantities of metal to be replaced by welding lend

themselves to the "cost per weight" method.

Calculating the cost per weight is the easiest cost estimating method, regardless of the welding process.
Probably for that reason, it is overused and misapplied. It is best used in applications in which significant
volumes of weld metal must be deposited, such as multi-pass applications. Hard-facing and overlay
welding are ideal applications. The variable of time is captured by measuring deposition rate (pounds of
deposit per hour). This method is best for estimating the cost of large, multi-pass welds. Cost per weight
is good for evaluating changes in groove joint details. It is not accurate when applied to single pass,
small, short welds, and it does not account for over-welding. Cost per weight can be estimated using the
following formulas:
Cost/lb. = (L&O cost/lb.) + (filler metal and shielding cost/lb.)
L&O Cost/lb. = (L&O rate)/{(deposition rate) x (operating factor)}
Filler metal cost/lb. (any process) = (cost of filler metal/lb.)/(electrode efficiency)
Shielding cost/lb. (gas) = (shielding gas flow rate) x (cost of shielding gas/ft. 3 ) /(deposition rate)
Shielding cost/lb. (flux) = (cost of flux/lb.) x (ratio of flux to filler metal)
Conclusion.
Determining the cost of welding is critical as manufacturers struggle to remain competitive in a global
economy. Simplified calculations make this task easier, although the simplification is not without risk.

LABOR COST
Labor costs are the total amount of money paid to employees during an accounting period on
daily, weekly, monthly, or job basis, such as a week or a month. In manufacturing businesses,
often management will break down labor costs into direct costs and indirect costs. These terms
just refer to if the labor went to direct production of material or if the cost was indirectly
related to the production of the material. Larger companies should try to utilize computer
software to calculate these costs due to the large volume of employees.

How to Calculate Direct Labor Cost

Calculate Direct Labor Cost

Many companies underestimate direct labor cost. The trick for calculating your direct labor
cost is making sure you include everything that is a cost for your company in hiring and
keeping an employee. This is not just how much you pay the person, but also how much
having an employee impacts your insurance premiums, benefits costs, payroll tax
contributions, etc.
How to Determine the Cost of Labor

1.
o 1
SALARIES: Calculate the total wages you pay your employees. This
includes everyone from temporary help up to and including any salary the
owner or president/CEO of the company is paid. All these wages are part
of your direct labor cost.

o 2
PENSION: Analyze the costs associated with your employees and their
pension plan that you pay. Some companies do not match any money put
into a pension plan, which keeps their costs at essentially zero. Meanwhile,
others match a certain percentage that each employee contributes. If your
company matches this percentage, it must be included in the pension
costs as direct labor cost. Some companies even contribute to a pension
plan for an employee without an employee contribution; once again, this is
part of direct labor cost.

HEALTH INSURANCE: Calculate the company's health insurance costs

per employee. Include any amount your company contributes to disability
insurance for your employees. This includes both short- and long-term
disability costs for your company that are paid by the employer. This
should be totaled to get your entire health care costs as part of direct labor
cost.

o 4
COMPENSATION PREMIUMS: Add the total cost your company must pay
in workers compensation premiums. This amount varies based on the total
of your payroll and the company's rating, so it must be considered when
determining direct labor costs.

o 5
 EMPLOYER CONTRIBUTION FOR TAXES: Include the employer
contribution for taxes that must be paid for each employee. This includes
the employer's portion of federal and state taxes as well as PAYE.

6
COST OF HIRING: Add in any additional costs you have associated with
hiring employees, such as advertising open positions or hiring a
headhunter. If you attend job fairs, include the cost for that in your direct
labor cost.

o 7
Combine all these category totals to come up with your total direct labor
cost.
EXAMPLE;
Step 1

Sort through the employee data and separate the employees by pay scales. For example, Firm A
has five employees. Two of the employees make N140 an hour, two employees make N200 an
hour and one employee has a salary of N500,000 a year.

Step 2

Add together the total number of hours worked by pay scales for hourly employees. In the
example, the N140 an hour worked a total 90 hours this week. The N200 an hour employees
worked 100 hours this week.

Step 3

Multiply the hourly rate by the number of hours worked. In our example, N140 an hour times 90
hours equals N12600 and N200 an hour times 100 hours equals N20,000.

Step 4

Divide any employee salaries by the time period. In the example, because a week is being
analyzed, divide N500,000 by 52 weeks. It is 52 weeks because there are 52 weeks in a year. So,
N500,000 divided by 52 weeks equals about N9615.

Step 5

Add the labor costs for each employee pay scale to find total labor costs. In the example, N12600
plus N20,000 plus N9615 equals total labor costs of N42215 for Firm A's five employees for the
week.
Welding Costs
Estimating the costs of depositing weld metal can be a difficult task because of the
many variables involved. Design engineers must specify the type and size of weld joint
to withstand the loads that the weldment must bear. The welding engineer must select
the welding process, and type of filler metal that will provide the required welds at the
least possible cost. With the cost of operations rising, selection of the process that
deposits weld metal most expediently must be carefully considered. Labor and
overhead account for approximately 85% of the total welding cost. Power costs usually
account for less than 1%; therefore, approximately 14% of the cost of the job is related
to the welding process selected.
COMPARISONS of WELDING COSTS
This section will cover cost estimating for steel weldments produced by the four most
common arc welding processes in use today: shielded metal arc welding, gas metal arc
welding, flux cored arc welding and gas tungsten arc welding. The GTAW process is a
relatively costly method of depositing weld metal, and is usually chosen for weld quality
or material thickness and composition limitations, rather than economy.
Welding costs may be divided into two categories; the “fixed” costs involved regardless
of the filler metal or welding process selected, and those related to a specific welding
process. Fixed costs entail material handling, joint preparation, fixturing, tacking,
preheating, weld clean-up, and inspection. Although some of these items will be
affected by the specific process and filler metal chosen, they are a necessary part of
practically all welding operations. Calculating these costs will depend upon your
workers’ capabilities and the equipment you use.
The cost of actually depositing the weld metal will vary considerably with the filler metal
and welding process selected. This cost element will be influenced by your labor and
overhead rates, the deposition rate and efficiency of the filler metal, your operating
factor, and the cost of materials and power.
Cost of Shielded Metal Arc Welding
The cost of welding for a specific application is one of the most important factors for
determining whether shielded metal arc welding should be used. The calculation
methods used in this chapter can also be used to compare the costs of this welding
process with other welding processes.
Shielded metal arc welding is a very low initial investment cost, however, its moderate
deposition rates and low operator factors may be outweighed by other considerations.
The cost of this welding process consists of three major items. These are (1) the labor
and overhead cost, (2) electrode cost, (3) electric power cost.
Labor Cost
The labor and overhead costs are usually combined in cost calculations, which is
common practice in many metal working industries. Overhead usually includes items
such as services, taxes, facilities maintenance, and the depreciation of the equipment.
The hourly rate and the overhead rate vary from plant to plant and the actual hourly
rates for each plant should be used for this calculation.
The operator factor is the percentage of time that the welder is actually welding. Since a
large amount of time goes into set-up, preheating, slag removal, and changing
electrodes, the operator factor for this process is relatively low. It can range from as low
as 10% to as high as 50%, but it is usually in the area of 20-40%. The operator factor
varies from plant to plant and for different types of weldments.
The deposition rates of the electrodes affect the labor and overhead costs because the
rate at which the electrode is deposited affects productivity. The travel speeds for the
shielded metal arc welding process are often low.
The equation for determining the labor and overhead cost per foot of weld is:

Electrode Cost
The cost of the electrode per foot of weld is determined by several factors. The first is
the weight of electrodes deposited per foot of weld. This is dependent on the size of the
weld to be made. The second is the cost per pound of the electrode. The third is the
deposition efficiency of the electrode. The deposition efficiency is the percentage of the
total weight of the electrode that is actually deposited in the weld. This varies from
electrode to electrode and for the calculations we will be using, a 2 in. (51 mm) stub loss
is assumed. Some of the weight is lost to spatter, slag, and some of the electrode
becoming gas. Table below shows the electrode consumption for different sizes and
types of welds. The equation for the cost of the electrode per foot of weld is:
 Calculation of Electrode Consumption

Electric Power Cost

The cost of the electric power is a relatively minor cost factor, but it can become
important when large amounts of welding are required on a certain job. The cost of
electric power used is dependent on the amount of welding current, welding voltage, the
efficiency of the power source, welding time, and the cost per kilowatt-hour. The power
source efficiency will be assumed for this calculation. This is the same equation used for
all of the welding processes. The equation for estimating the electric power cost is:
Examples
Table below shows a cost comparison of several different electrode types. The following
are sample calculations: (Values taken from the Table) E6011, 3/16" Electrode, 1/4"
Fillet Weld.

Use the following formula to figure Welding Time, which is an additional calculation you
need to determine Electric Power Costs per Foot of Weld.
When you have your labor, electrode, and power costs calculated, you can determine
your total costs per foot of weld.

SMAW example

Cost Comparison of Different Sizes of Diameter Electrodes Used for Making

Different Weldments
Table shows the different costs associated with different electrodes.

Table - Cost Comparison of Different 3/16” Diameter Electrodes Used For Making
a 1/4” Fillet Weld.
Cost of Gas Tungsten Arc Welding
Gas tungsten arc welding is expensive and not very economical to use on thick metal,
but on many other applications, it will be the best method. Because this process can be
used to weld very thin metal, dissimilar metals, and a wide variety of non-ferrous metals,
it is often chosen for its capabilities with less consideration given to cost factors. In
some cases, it is the only usable welding process. The following cost calculation
methods can be used to compare the cost of this welding process with other welding
processes.
The initial investment cost for this process can vary widely depending on the complexity
of the equipment required. This can range from a high frequency current and inert gas
attachment added to a shielded metal arc-welding machine, up to a fully automatic
welding head and a programmable power source. There are also many possibilities that
exist between these extremes. The type of equipment used depends on the type of
application.
Manual gas tungsten arc welding generally produces moderate deposition rates and low
operator factors compared to other arc welding processes. Automatic operations will
generally give higher deposition rates and higher operator factors.
The cost of consumables can also vary widely because of the price differences for the
different shielding gases and filler metals. For some applications, no filler metal is used
and for the welding of some of the more exotic metals, filler wire can be very expensive.
Technically, the tungsten electrode is non-consumable, but tungsten electrodes have to
be replaced after a period of use. The frequency at which electrodes must be replaced
depends on conditions such as the welder skill and the amount of welding current. A
good approximation of the cost of the tungsten electrode is 4% of the shielding gas cost.
The torch nozzles may also have to be replaced from time to time, depending on the
type of nozzle and the care they are given by the welder.
The cost of this welding process is similar to SMAW but it has additional factors to
consider in the shielding gas and the wear on the tungsten electrode. It consists of four
major items including (1) the labor and overhead cost, (2) the filler metal cost, (3) the
shielding gas cost, (4) the electric power cost, and one minor item, wear on the
electrode.

Labor Cost
As discussed earlier, the labor and overhead costs are often combined in cost
calculations; this is usually the largest cost factor in welding.
The operator factor in percentage is about the same for GTAW as for SMAW, but for
different reasons. With GTAW, while little or no slag is produced, more time is needed
for setup, preheating, and changing filler rods. However, because this process can be
used manually and automatically, the operator factor can vary widely depending on
which process you use.
For manual welding, the operator factor is relatively low and may range from about 10%
to as high as 50%, but is normally in the range of 20% to 40%. Automatic welding
generally gives high operator factors because it can usually proceed to completion
without interruption. Operating factors for this can rise as high as 80% or more,
depending on the specific application.
The deposition rates and travel speeds affect the labor and overhead costs because the
rate at which the weld can be completed affects the productivity; travel speeds used
with this process are often fairly low.
The equation for determining the labor and overhead cost per foot of weld is the same
as SMAW:

The equation for determining your total labor cost is:

Filler Metal Cost

Filler metal costs are made up of the same three factors that affect SMAW: 1) weight of
electrodes deposited per foot of weld dependent on the size of the weld to be made, 2)
cost per pound of the electrode, and 3) deposition efficiency of the electrode. However,
the deposition efficiency is nearly 100% for most GTAW welding operations because
little or no filler metal is lost through spatter, vaporization, or stub end loss. For the
calculations to be used for GTAW, a deposition efficiency of 100% will be assumed.
Refer to Tables below for filler metal weights and consumption. The equations used for
determining the cost of the filler metal are as follows:
For manual welding:

Alternatively, for manual welding you can use:

For automatic welding:

Table — Inches Per Pound of Filler or Bare Electrode Wire.

Table — Filler Metal Consumption for Different Sizes and Types of Welds
Made With Different Types of Base and Filler Metal.

*Note: The metals within these two categories do not all have exactly the same density
but are close enough to give a good approximation.
These figures are based on an 1/16 inch (1.6 mm) reinforcement and a 100%
deposition efficiency. For manual welding, approximately a 5% increase should be
added to these figures.

Shielding Gas Cost

The calculation for the cost of shielding gas is the same for GTAW, GMAW, and FCAW.
The cost of the shielding gas depends on the gas flow rate, the arc time, and the cost
for the type of shielding gas. Helium costs much more than argon per cubic foot and
higher flow rates must be used with helium that can make it much more expensive than
argon. The equation for determining the shielding gas cost is:

Electric Power Cost

Electric power costs are the same in all the welding processes. The equation for the
electric power cost is:

To determine arc time per foot of weld, use:

Then include your operator factor to calculate total welding time per foot of weld.
Examples
Now you are ready to calculate your total costs per foot of weld. Table 5-5 shows the
figures used for the cost calculations of both manual and automatic gas tungsten arc
welding. The following is a sample calculation of the manual method of welding (values
taken from Table 5-5).

For this example of a calculation, assume a tungsten electrode cost at 4% of the cost of
the shielding gas.
Cost Comparison of Manual vs. Automatic
Table 5-5 — Cost comparison of Manual vs. Automatic welding
Method of Welding Manual Automatic
Cost of Gas Metal Arc Welding
Gas metal arc welding can be used to weld many thicknesses and types of metals as
economically as possible. It is usually selected because it is the least expensive
process that can be used for many applications.
The initial investment for the equipment can vary depending on the complexity and size
of the equipment used. The equipment for a semi-automatic welding station is much
less expensive than the equipment required for a fully automatic set-up. The type of
equipment depends on the type of application. Semi-automatic gas metal arc welding
produces higher deposition rates and operator factors when compared to manual
shielded metal arc welding.
The level of welder skill for gas metal arc welding is generally less than that required for
shielded metal arc welding and gas tungsten arc welding. This helps to develop welds
with a more consistent quality. Semi-automatic welding often competes against manual
processes such as oxyacetylene welding, shielded metal arc welding, and gas tungsten
arc welding for many applications. This process will generally produce higher deposition
rates and operator factors than these other manual processes.
Automatic gas metal arc welding operations will give higher deposition rates and
operator factors. The cost of electrode wires and shielding gases can vary widely
because of price differences between different types and sizes of electrodes and
different types of shielding gas. The cost of electric power consumed will depend on the
type of machine, amount of welding, and the welding currents being used.
The cost of this welding process consists of four major items: labor and overhead,
electrode, shielding gas, and electric power.
1 Labor Cost
GMAW can be used semi-automatically and automatically, which means the operator
factor can vary widely. Operator factors for semi-automatic welding usually range from
about 25% to as high as 60%. These operator factors are low compared to machine and
automatic welding, where operator factors can range up to 80% or more depending on
the application. The machine and automatic welding operations give higher operator
factors because the welding can proceed to completion without interruption. The
deposition rates and travel speeds affect the labor and overhead costs because the rate
at which the electrode wire is deposited affects the productivity. The deposition rates
and travel speeds used will be affected by the size of the electrode wire, the welding
current, the thickness of the base metal, and the type of base metal.
The equation for determining the labor and overhead costs is:

2 Electrode Cost
As previously discussed, the cost of the electrode wire per weld is determined by
several factors: the weight of the weld deposited, the cost per pound of the filler metal,
and the deposition efficiency of the filler metal. Refer to Tables above which show the
inches per pound and the filler metal consumption for different sizes and types of welds.
The small diameter solid electrode wires used for this process cost more per pound
than larger diameter solid electrode wires and covered electrodes. Electrode wire is less
expensive per pound when supplied in a reel or large coil, as compared to a small coil.
The total amount of wire purchased also affects the cost. Large shipments of wire will
generally cost less per pound than small shipments.
The deposition efficiency is about 95% for most welding operations. Some of the
electrode wire is lost to spatter and vaporization. This will vary slightly depending on the
type of shielding gas. Argon will generally give higher deposition efficiencies than
carbon dioxide due to the fact that less spatter is produced by spray transfer. The
lowest deposition efficiencies are obtained when using the globular transfer mode
(Globular transfer means the weld metal transfers across the arc in large droplets,
usually larger than the diameter of the electrode being used. This mode of transfer
generally is used on carbon steel only and uses 100 percent CO 2 shielding gas)
because larger amounts of spatter are created.
The equations used for determining the cost of the electrode/filler metal are:

3 Shielding Gas Cost

Remember, the calculation for GTAW, GMAW, and FCAW is the same
The equation for determining the shielding gas cost is:

4 Electric Power Cost

Remember, the calculation for SMAW, GTAW, GMAW, and FCAW is the same.
The equation for electric power cost is:

Examples
Table 5-6 shows the figures used for cost calculations of semi-automatic and automatic
gas metal arc welding and a comparison with shielded metal arc welding. In equations
where arc time is necessary, it can be determined from the following equations:
The total welding time can then be determined by the equation:

The following is a sample calculation for making a ¼ in. (6.4 mm) fillet weld with
Semi-automatic gas metal arc welding using the figures from Table 5-6.
GMAW example

Cost Comparison of Manual (SMAW) vs. Semiautomatic (GMAW) and

Automatic (GMAW)
Table 5-6 — Cost Comparison of Manual Shielded Metal Arc Welding vs.
Semiautomatic and Automatic Gas Metal Arc Welding for Making a ¼ in.
(6.4 mm) Fillet Weld.
Cost of Flux Cored Arc Welding
Flux cored arc welding has advantages over other processes which make it the most
economical welding method for many different applications. To select a welding process
for your project or task, you should compare factors such as deposition rates, welding
speeds, joint preparation time, operator factors, and welding material costs.
Like GMAW, the initial investment for the equipment can vary considerably depending
on the size and complexity of the equipment used, and the equipment used is often the
same as for gas metal arc welding. Because of the higher current levels used in flux
cored arc welding, larger power sources may be needed. With the self-shielding
electrode wires, a gas shielding system is not needed, which simplifies and reduces the
overall cost of the equipment. In some cases where gas metal arc welding equipment is
available, a change to flux cored arc welding would require almost no new equipment.
The equipment for semiautomatic welding is much less expensive than equipment for
automatic welding.
An advantage of flux cored arc welding over the manual welding processes is that a
lower degree of welder skill is needed. A welder skilled in gas metal arc welding would
have very little trouble learning to weld with flux cored arc welding. This process
generally has good welder appeal. This is particularly true when compared to gas metal
arc welding at the higher current levels.
Another example is the comparison to semiautomatic submerged arc welding where it is
more difficult to weld because the weld puddle is not visible. Semiautomatic flux cored
arc welding usually competes with shielded metal arc welding, gas metal arc welding
and submerged arc welding. Automatic flux cored arc welding usually competes against
automatic gas metal arc welding and submerged arc welding. In flux cored arc welding,
the costs of materials will vary depending on the electrode and whether or not shielding
gas is required. The electric power cost will depend on the machine and the welding
parameters.
The cost of this process consists of four major items that are labor and overhead,
electrodes, shielding gas and electric power. The cost calculation methods used in this
chapter can be used to compare the cost of flux cored arc welding to the other
processes.
1 Labor Cost
Because this process is applied semi automatically and automatically, the operator
factor can vary widely. Operator factors for semiautomatic welding usually range from
25% to as high as 60%. When compared to gas metal arc welding, operator factors are
usually slightly lower with flux cored arc welding because more time is spent removing
slag. Since flux cored arc welding uses a continuously fed electrode wire, operator
factors are much higher than shielded metal arc welding, where much time is spent
changing electrodes. Operator factors for machine and automatic welding can range up
to 80% or more, depending on the application.
The equation for determining the labor and overhead costs is:

Or

2 Electrode Cost
The deposition efficiency of flux cored wire is lower than that of solid wires because the
flux core provides shielding gas and a slag covering. Self-shielding flux cored wires
typically have a deposition efficiency of about 75-80%, which is much higher than
obtained from covered electrodes. Gas shielded electrode wires have deposition
efficiencies ranging from 80-90%. These are higher than self-shielding wires because
less of the core becomes shielding gas and slag. With both types of flux cored wires,
some wire is lost to spatter and vaporization. Spatter is generally higher with
selfshielding electrodes that also contributes to the lower deposition efficiencies. The
type of shielding gas used will have an effect on the deposition efficiency. Carbon
dioxide will produce higher spatter levels than argon-carbon dioxide and argon-oxygen
mixtures.
The equations used for determining the cost of an electrode wire are:
For the first equation, the wire weight per unit of length is needed. This figure will vary
depending on the type of electrode wire used. Some flux-cored electrodes contain more
core elements than others do. This is true of the self-shielding wires when compared to
gas shielded wires. A good approximation of the percent fill or amount of flux in a
tubular wire for cost calculations is about 16% by weight. This gives inches of wire per
pound as shown in Table 2-2.
Table 2-2 — Inches of wire needed to make one pound.

1.4.3 Shielding Gas Cost

If you do not use self-shielded flux cored wire you will have to determine shielding gas
costs.
The equation for determining the shielding gas cost is:
4 Electric Power Cost
The equation for electric power cost is:

Examples
Table 2-3 shows the figures used for a cost calculation comparison of shielded metal
arc welding, gas metal arc welding, flux cored arc welding using a self-shielding wire,
flux cored arc welding using a gas-shielded wire, and submerged arc welding. The
examples given are typical but the exact data should be obtained from the
manufacturer’s data sheets and the actual welding conditions. In equations where arc
time is necessary, it can be determined from the following equation.

The total welding time can then be determined by the equation:

The following sample calculation is for making a ½ inch (12.7 mm) fillet weld in the
horizontal position using semiautomatic flux cored arc welding with a gas-shielded
electrode.
 FCAW example

Cost Comparison of Between (SMAW), (GMAW) and (FCAW)

Table 2-3 — Cost Comparisons Between SMAW, GMAW, FCAW, and Submerged
Arc Welding of 1/2 in. (12.7 mm) Fillet Weld in the Horizontal Position.
Profit Margin
Profit margin is part of a category of profitability ratios calculated as net income divided
by revenue, or net profits divided by sales. Net income or net profit may be determined
by subtracting all of a company’s expenses, including operating costs, material costs
(including raw materials) and tax costs, from its total revenue. Profit margins are
expressed as a percentage and, in effect, measure how much out of every Naira of
sales a company actually keeps in earnings. A 20% profit margin, then, means the
company has a net income of N0.20 for each Naira of total revenue earned.
While there are a few different kinds of profit margins, including “gross profit margin,”
“operating margin,” (or "operating profit margin") “pretax profit margin” and “net margin”
(or "net profit margin") the term “profit margin” is also often used simply to refer to net
margin. The method of calculating profit margin when the term is used in this way can
be represented with the following formula:

Profit Margin = Net Income / Net Sales (revenue)

Profit percentage
On the other hand, profit percentage is calculated with cost price taken as base

Suppose you buy something for N100 and sell it off for N150.
cost price = N100
selling price (revenue) = N150
profit = N150 - N100 = N50
profit percentage = N50/N100 = 50% (profit as percentage of cost price)
profit margin = N50/N150 = 33.33% (profit as percentage of selling price or revenue)

Profit margin is similar but distinct from the term “profit percentage,” which divides net
profit on sales by the cost of goods sold to help determine the amount of profit a
company makes on selling its goods, rather than the amount of profit a company is
making relative to its total expenditures.
WELDING WORKSHOP LAYOUT
 Welding Shop Design

A lot of advantages abounds if a new welding workshop is to be designed from the scratch
because it offers the possibility to design a smooth-running, functional, and efficient place. By
choosing the right equipment and layout, energy costs will be reduced, space will be increased,
consequently providing a more ergonomic and pleasant workplace.

Space vs. Efficiency

Consider the space of individual booths within the welding shop. There should be ample room
for comfortable work and room for supervisors and others to pass through the area. Finding the
right balance between spaciousness and space-efficiency may be tricky.

If the shop is very large overall, you may have wasted walking time between stations. Too small
and there will be no room to pass from work tables, to welding booths, to cutters, grinders,
hydraulic presses and cooling tanks. If welders have to work in cramped quarters you may suffer
occasional collisions between welders and/or equipment. Consider too, if equipment needs to be
replaced, will you need to move several booths or welders to get old/faulty pieces of equipment
out.

Ergonomics-human engineering which is the study of the influence of the environment on

productivity in the workplace (such as equipment and layout).

Applying ergonomic principles to welding reduces space and proximity issues while decreasing
likelihood of injury. A streamlined and comfortable environment leads to logical work flow and
efficiency. Many experts recommend a booth size of 7x10 feet to accommodate worker and
occasional visitor or helper.

In cramped spaces – choose your equipment very carefully. A tight floor plan means equipment
with a smaller footprint may be well warranted. An inverter, for example, takes up 20% less
space than a rectifier type unit.

Shop on Paper

An architect can provide you with an initial drawing for the shop layout. Use a copy of the cut-
to-scale drawings to sketch in people. Mentally walk through activities and imagine people in the
space and how they will use it. Doing so will help you design a space optimized for productivity
and efficiency.

Once the primary welders and equipment are drawn in, consider the additional tools needed to
perform each task. Add space for storage of supplies and personal protective equipment. Take
note of walking distance to these places in relation to the frequency of which they will need to be
visited. It may seem insignificant, but if you have to make trips from one end of the shop to the
other, multiple times in an eight hour day, those trips add up!

Consider cutting stations and other work areas. Grinders that have their own booth will reduce
noise and mess. Weigh the cost of equipment in relation to how it will be used, if it will save
time, travel, and/or space. Also consider storage of welding gases, fume extraction, and cleaning.

Electricity

Consult with an electrician to discuss service to the shop. Multiple power sources should be
written into the plan. Electricity is one of the largest expenses in a welding shop. Select a power
option in terms of volts and amps that will support the number of welders, cutting machines,
grinders, and presses that will be used. Prices and efficiencies should be weighted. The exterior
wall is prime real estate for electrical service, so keep that in mind when laying out booths and
equipment. Make sure the architect is aware of this, and the room needed for the main power box
and individual circuit breakers.
Gases

If there is an option of a main gas manifold system, then there would be drops to each welding
station and cutting location. Consider which gases will be used where- acetylene, oxygen, argon,
CO2, water, compressed air. Lines need to be adequately spaced and room needs to be allowed
for servicing flow meters and regulators.

Fumes

Fume extraction should take place from each individual booth. A flexible hood will allow
positioning directly over the work to remove fumes. Heavier-than-air gasses like argon and CO2
should be collected close to the floor. A third level of extraction would be near the ceiling to
remove the higher fumes. Vaporized metal fumes would be extracted from downdraft tables at
the plasma arc cutting machines.

If your shop is already running, consider which steps you can implement to improve the current
layout. When you need to replace equipment, choose the right equipment. Wise choices in
equipment and layout result in reduced energy costs, increased space, and provide a more
ergonomic and pleasant place.

Principles of motion economy

The principles of motion economy form a set of rules and suggestions to improve the manual
work in manufacturing and reduce fatigue and unnecessary movements by the worker, which can
lead to the reduction in the work related trauma.

Categories

o 1.1 Use of Human Body

o 1.2 Arrangement of the Work Place

o 1.3 Design of Tools and Equipment

Categories

The principles of motion economy can be classified into three groups:

1. Principles related to the use of human body,

2. Principles related to the arrangement of the work place,

3. Principles related to the design of tools and equipment.

Use of Human Body

• The two hands should begin motions at the same time.

• The two hands should not be idle at the same time except during rest periods.

• Motions of the arms should be made in opposite and symmetrical directions and should
be made simultaneously

• Hand motions should be confined to the lowest classification with which it is possible to
perform the work satisfactorily:

1. Finger motions

2. Wrist motions

3. Forearm motions

4. Upper arm motions

5. Shoulder motions

• Momentum should be employed to assist the worker whenever possible, and it should be
reduced to a minimum if it must be overcome by muscular effort.

• Smooth continuous motions of the hands are preferable to zigzag motions or straight-line
motions involving sudden and sharp changes in direction.

Arrangement of the Work Place

• There should be a definite and fixed place for all tools and materials.

• Tools, materials, and controls should be located close in and directly in front of the
operator.

• Drop delivers should be used whenever possible.

• Materials and tools should be located to permit the best sequence of motions.

• Arrange the height of the workplace and chair for alternate sitting and standing, when
possible.

• Provide a chair of the type and height to permit good posture.

Design of Tools and Equipment

• Combine tools whenever possible.

• Preposition tools and materials.

• Where each finger performs some specific movement, the load should be distributed in
accordance with the inherent capacities of the fingers.

• For light assembly, a screwdriver handle should be smaller at the bottom.

• Momentum should be used to help the worker in doing their task not to increase their
task.
Maintenance

What is Maintenance?

Maintenance involves keeping the workplace, its structures, equipment, machines, furniture and
facilities in good repair and operating efficiently and safely. It includes many tasks including
repairing, replacing, servicing, inspecting and testing. The term could also be used in relation to
the importance of keeping your staff safe, fit and healthy.

There are two main types of maintenance work. Routine/preventative maintenance is usually
planned and includes scheduled inspections repairs and replacement to make sure everything
continues to work. It can be compared to an annual service on your car. Corrective maintenance
is needed when things go wrong or break downs occur demanding reactive action to be taken to
get things up and running again. It can be compared to having a repair carried out on your car
after a part has failed.

Maintenance may refer to:

1 Non-technical maintenance

2 Biological science

3 Technical maintenance

3.1 General types of technical maintenance

Non-technical maintenance

• Alimony, also called maintenance in British English

• Child maintenance, also commonly called "child support"

• Champerty and maintenance, two related legal doctrines

• Feudal maintenance, system of funding armies

Biological science

• Maintenance respiration

• Maintenance of an organism

Technical maintenance

• Mechanical Maintenance Technician

• Aircraft maintenance

• Maintenance, repair and operations

• Car maintenance

• Railroad track maintenance

• Software maintenance

• Property maintenance

General types of technical maintenance

• Breakdown maintenance

• Condition-based maintenance

• Corrective maintenance

• Planned maintenance

• Predictive maintenance

• Preventive maintenance

Why is it important?

Regular maintenance is essential to keep premises, equipment, machines and the work
environment safe and reliable. It helps to eliminate workplace hazards. Lack of maintenance or
inadequate maintenance can lead to dangerous situations, accidents and health problems.

It is important that a planned maintenance programme is in place and that all maintenance work
is risk assessed before beginning the task

Maintenance types
Generally speaking, there are three types of maintenance in use:

 Preventive maintenance, where equipment is maintained before break down occurs.

Recent studies have shown that Preventive maintenance is effective in preventing age
related failures of the equipment. For random failure patterns which amount to 80% of
the failure patterns, condition monitoring proves to be effective.

 Operational maintenance, where equipment is maintained in using.

  Corrective maintenance, where equipment is maintained after break down. This
maintenance is often most expensive because worn equipment can damage other parts
and cause multiple damages.

Preventive maintenance
Preventive maintenance is maintenance performed in an attempt to avoid failures, unnecessary
production loss and safety violations.

Preventive maintenance (PM) has the following meanings:

1. The care and servicing by personnel for the purpose of maintaining equipment and
facilities in satisfactory operating condition by providing for systematic inspection,
detection, and correction of incipient failures either before they occur or before they
develop into major defects.
2. Maintenance, including tests, measurements, adjustments, and parts replacement,
performed specifically to prevent faults from occurring.

The primary goal of maintenance is to avoid or mitigate the consequences of failure of

equipment. This may be by preventing the failure before it actually occurs which Planned
Maintenance and Condition Based Maintenance help to achieve. It is designed to preserve and
restore equipment reliability by replacing worn components before they actually fail. Preventive
maintenance activities include partial or complete overhauls at specified periods, oil changes,
lubrication and so on. In addition, workers can record equipment deterioration so they know to
replace or repair worn parts before they cause system failure. The ideal preventive maintenance
program would prevent all equipment failure before it occurs.

Difference between Preventive and Predictive Maintenance

Predictive maintenance tends to include direct measurement of the item.

Examples

An individual bought an incandescent light bulb. The manufacturing company mentioned that
the life span of the bulb is 3 years. Just before the 3 years, the individual decided to replace the
bulb with a new one. This is called preventive maintenance.

 On the other hand, the individual has the opportunity to observe the bulb operation daily.
After two years, the bulb starts flickering. The individual predicts at that time that the
bulb is going to fail very soon and decides to change it for a new one. This is called
predictive maintenance.
 The individual ignores the flickering bulb and only goes out to buy another replacement
light bulb when the current one fails. This is called corrective maintenance.
Planned maintenance
Planned Preventive Maintenance ('PPM') or more usual just simple Planned Maintenance
(PM) or Scheduled Maintenance is any variety of scheduled maintenance to an object or item
of equipment. Specifically, Planned Maintenance is a scheduled service visit carried out by a
competent and suitable agent, to ensure that an item of equipment is operating correctly and to
therefore avoid any unscheduled breakdown and downtime.

Together with Condition Based Maintenance, Planned maintenance comprises preventive

maintenance, in which the maintenance event is preplanned, and all future maintenance is
preprogrammed. Planned maintenance is created for every item separately according to
manufacturers recommendation or legislation. Plan can be based on equipment running hours,
date based, or for vehicles distance travelled. A good example of a planned maintenance program
is car maintenance, where time and distance determine fluid change requirements.

Condition-based maintenance (CBM), shortly described, is maintenance when need arises. This
maintenance is performed after one or more indicators show that equipment is going to fail or that
equipment performance is deteriorating. A good example of Condition Based Maintenance is the
oil pressure warning light that provides notification that you should stop the vehicle because
failure will occur because engine lubrication has stopped.

Planned maintenance has some advantages over Condition Based Maintenance such as:

 easier planning of maintenance and ordering spares,

 costs are distributed more evenly,
 no initial costs for instruments for supervision of equipment.

Disadvantages are:

 less reliable than equipment with fault reporting associated with CBM
 more expensive due to more frequent parts change.
 requires training investment and ongoing labor costs

Parts that have scheduled maintenance at fixed intervals, usually due to wear out or a fixed shelf
life, are sometimes known as time-change interval, or TCI items.

Operational maintenance
Operational maintenance is the care and minor maintenance of equipment using procedures
that do not require detailed technical knowledge of the equipment’s or system’s function and
design. This category of operational maintenance normally consists of inspecting, cleaning,
servicing, preserving, lubricating, and adjusting, as required. Such maintenance may also include
minor parts replacement that does not require the person performing the work to have highly
technical skills or to perform internal alignment.
As the term implies, operational maintenance, is performed by the operator of the equipment. Its
purpose is threefold: (1) to make the operator aware of the state of readiness of the equipment;
(2) to reduce the delays that would occur if a qualified technician had to be called every time a
simple adjustment were needed; and (3) to release technicians for more complicated work

This form of preventative maintenance can be performed in any setting where machines,
equipment, or vehicles are used. This may include manufacturing plants and factories, as well as
automotive shops. In many commercial buildings, heating and cooling engineers perform
operational maintenance tasks on furnaces, boilers, and air conditioners.

Some operational maintenance responsibilities can be as simple as inspecting the machine to spot
any changes or issues. This allows the operator to detect a potential danger, such as loose
fasteners or debris that could contribute to an accident. Basic cleaning, including removing
debris or excess grease from a machine, is also considered part of operational maintenance.

Depending on the type of equipment in use, operators may also be responsible for replacing worn
out filters or cartridges, or removing and replacing a worn belt, cutting tool, or grinding stone.
Operational maintenance may entail keeping machinery well lubricated to reduce the risk of
friction or failure. Many basic machine adjustments needed during the course of operation also
fall within this category of preventative maintenance.

Corrective maintenance
Corrective maintenance is a maintenance task performed to identify, isolate, and rectify a fault
so that the failed equipment, machine, or system can be restored to an operational condition
within the tolerances or limits established for in-service operations.

A French official norm defines "corrective maintenance" as maintenance which is carried out
after failure detection and is aimed at restoring an asset to a condition in which it can perform its
intended function (NF EN 13306 X 60-319 standard, June 2001).

Corrective maintenance can be subdivided into "immediate corrective maintenance" (in which
work starts immediately after a failure) and "deferred corrective maintenance" (in which work is
delayed in conformance to a given set of maintenance rules).

Corrective maintenance is probably the most commonly used approach, but it is easy to see its
limitations. When equipment fails, it often leads to downtime in production. In most cases, this is
costly business. Also, if the equipment needs to be replaced, the cost of replacing it alone can be
substantial. It is also important to consider health, safety and environment (HSE) issues related to
malfunctioning equipment.

Corrective maintenance can be defined as the maintenance which is required when an item has
failed or worn out, to bring it back to working order. Corrective maintenance is carried out on all
items where the consequences of failure or wearing out are not significant and the cost of this
maintenance is much greater than preventive maintenance.
Corrective maintenance is the program focused on the regular task that will maintain all the
critical machinery and the system in optimum operating conditions. The major objectives of the
program are to 1.Eliminating breakdown 2.Eliminating deviation 3.Eliminating unnecessary
repairs 4.Optimize all the critical planned system.

Reliability centered maintenance

Reliability centered maintenance is an engineering framework that enables the definition of a

complete maintenance regime. It regards maintenance as the means to maintain the functions a
user may require of machinery in a defined operating context. As a discipline it enables
machinery stakeholders to monitor, assess, predict and generally understand the working of their
physical assets. This is embodied in the initial part of the RCM process which is to identify the
operating context of the machinery, and write a Failure Mode Effects and Criticality Analysis
(FMECA). The second part of the analysis is to apply the "RCM logic", which helps determine
the appropriate maintenance tasks for the identified failure modes in the FMECA. Once the logic
is complete for all elements in the FMECA, the resulting list of maintenance is "packaged", so
that the periodicities of the tasks are rationalised to be called up in work packages; it is important
not to destroy the applicability of maintenance in this phase. Lastly, RCM is kept live throughout
the "in-service" life of machinery, where the effectiveness of the maintenance is kept under
constant review and adjusted in light of the experience gained.

MRO software
In many organizations because of the number of devices or products that need to be maintained
or the complexity of systems, there is a need to manage the information with software packages.
This is particularly the case in aerospace (e.g. airline fleets), military installations, large plants
(e.g. manufacturing, power generation, petrochemical) and ships.

These software tools help engineers and technicians in increasing the system availability and
reducing costs and repair times as well as reducing material supply time and increasing material
availability by improving supply chain communication.

As MRO involves working with an organization’s products, resources, suppliers and customers,
MRO packages have to interface with many enterprise business software systems (PLM, EAM,
ERP, SCM, CRM).

One of the functions of such software is the configuration of bills of materials or BOMs, taking
the component parts list from engineering (eBOM) and manufacturing (mBOM) and updating it
from "as designed“ through "as built”, "as delivered", “as maintained”, and “as used”.

Another function is project planning logistics, for example identifying the critical path on the list
of tasks to be carried out (inspection, diagnosis, locate/order parts and service) to calculate
turnaround times (TAT).

Other tasks that software can perform:

  Planning operations,
 Managing execution of events,
 Management of assets (parts, tools and equipment inventories),
 Knowledge-base data on:
o Maintenance service history,
o Serial numbered parts,
o Reliability data: MTBF, MTTB (mean time to breakdown), MTBR (mean time
between removals),
o Maintenance and repair documentation and best practices,
o Warranty/guarantee documents.

Many of these tasks are addressed in computerized maintenance management systems (CMMS).
Data standards have been developed around these activities, most notably EAMXML and
MIMOSA.

MRO Goods and Services

MRO goods are typically defined as any goods used in the creation of a product but not in the
final product itself. Examples include:

1. The machinery used to make a product

2. Spare parts for the machinery that creates the product
3. Items used to maintain the facility in which the product is made

MRO services such as ecommerce websites provide access to millions of products at the click of
a button. Previously customers would have had to buy goods via a catalog or parts supplier over
the phone. New forms for online businesses in the MRO space are making the access to goods
and services more convenient.

Critical Path Analysis

DEFINITION of 'Critical Path Analysis'
A project-management technique that lays out all the activities needed to complete a task,
the time it will take to complete each activity and the relationships between the activities.
Also called the "critical path method", critical path analysis can help predict whether a
project can be completed on time and can be used to reorganize the project both before
starting it, and as it progresses, to keep the project's completion on track and ensure that
deliverables are ready on time.
Either manually or using computer software, the project manager first lists each activity,
the order it must be completed in and how long it is expected to take, and then diagrams
the process.

The critical path also refers to the way the diagram shows those activities that must be
completed, and complete in a specific order, so that the project can be completed
successfully and on time. A series of lines and circles visually depict the critical path.
Each circle represents an activity that needs to be completed and each line shows the
relationship between two activities. The critical path will be the longest path through the
diagram, and will show how long a project is expected to take if the scope does not
change and everything goes according to plan.

The Critical Path Method (CPM)

The Critical Path Method (CPM) can help you keep your projects on track.

Critical path schedules...

 Help you identify the activities that must be completed on time in order to complete the whole
project on time.
 Show you which tasks can be delayed and for how long without impacting the overall project
schedule.
 Calculate the minimum amount of time it will take to complete the project.
 Tell you the earliest and latest dates each activity can start on in order to maintain the schedule.

The CPM has four key elements...

 Critical Path Analysis

 Float Determination
 Early Start & Early Finish Calculation
 Late Start & Late Finish Calculation

 Critical Path Analysis

 The critical path is the sequence of activities with the
longest duration. A delay in any of these activities will result
in a delay for the whole project. Below are some critical path
examples to help you understand the key elements...

Using the Critical Path Method (CPM)
 The duration of each activity is listed above each node in
the diagram. For each path, add the duration of each node
to determine it's total duration. The critical path is the one
with the longest duration.
 There are three paths through this project...

Use Critical Path Analysis to find Your Critical Path

 Float Determination
 Once you've identified the critical path for the project, you
can determine the float for each activity. Float is the amount
of time an activity can slip before it causes your project to
be delayed. Float is sometimes referred to as slack.
 Figuring out the float using the Critical Path Method is fairly
easy. You will start with the activities on the critical path.
Each of those activities has a float of zero. If any of those
activities slips, the project will be delayed.
 Then you take the next longest path. Subtract it's duration
from the duration of the critical path. That's the float for each
of the activities on that path.
 You will continue doing the same for each subsequent
longest path until each activities float has been determined.
If an activity is on two paths, it's float will be based on the
longer path that it belongs to.

Determining Float


Using the critical path diagram from the previous section,

Activities 2, 3, and 4 are on the critical path so they have a
float of zero.
 The next longest path is Activities 1, 3, and 4. Since
Activities 3 and 4 are also on the critical path, their float will
remain as zero. For any remaining activities, in this case
Activity 1, the float will be the duration of the critical path
minus the duration of this path. 14 - 12 = 2. So Activity 1
has a float of 2.
 The next longest path is Activities 2 and 5. Activity 2 is on
the critical path so it will have a float of zero. Activity 5 has a
float of 14 - 9, which is 5. So as long as Activity 5 doesn't
slip more than 5 days, it won't cause a delay to the project.

 Early Start & Early Finish

Calculation
 The Critical Path Method includes a techniques called the
Forward Pass which is used to determine the earliest date
an activity can start and the earliest date it can finish. These
dates are valid as long as all prior activities in that path
started on their earliest start date and didn't slip.
 Starting with the critical path, the Early Start (ES) of the first
activity is one. The Early Finish (EF) of an activity is its ES
plus its duration minus one. Using our earlier example,
Activity 2 is the first activity on the critical path: ES = 1, EF =
1 + 5 -1 = 5.
 Critical Path Schedules
 You then move to the next activity in the path, in this case
Activity 3. Its ES is the previous activity's EF + 1. Activity 3
ES = 5 + 1 = 6. Its EF is calculated the same as before: EF
= 6 + 7 - 1 = 12.
 If an activity has more than one predecessor, to calculate its
ES you will use the activity with the latest EF.
 Late Start & Late Finish
Calculation
 The Backward Pass is a Critical Path Method techique you
can use to determine the latest date an activity can start and
the latest date it can finish before it delays the project.
 You'll start once again with the critical path, but this time
you'l begin from the last activity in the path. The Late Finish
(LF) for the last activity in every path is the same as the last
activity's EF in the critical path. The Late Start (LS) is the
LF - duration + 1.
 In our example, Activity 4 is the last activity on the critical
path. Its LF is the same as its EF, which is 14. To calculate
the LS, subtract its duration from its LF and add one. LS =
14 - 2 + 1 = 13.
 You then move on to the next activity in the path. Its LF is
determined by subtracting one from the previous activity's
LS. In our example, the next Activity in the critical path is
Activity 3. Its LF is equal to Activity 4 LS - 1. Activity 3 LF =
13 -1 = 12. It's LS is calculated the same as before by
subtracting its duration from the LF and adding one. Activity
3 LS = 12 - 7 + 1 = 6.
 You will continue in this manner moving along each path
filling in LF and LS for activities that don't have it already
filled in.
 In Conclusion...
 The Critical Path Method is an important tool for managing
your project's schedule. As you can see, it's not very difficult
to determine it's key elements. However, once your project
has more than a few activities, critical path scheduling can
become tedious.
 Luckily, today's project management software provides this
information for you. So take a few minutes and learn how to
access this information from your software and you'll soon
be on top of your schedule and performing critical path
analysis like a seasoned pro.