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UNIT III - INTRODUCTION TO COST

ESTIMATION

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CONTENT

➢Importance of costing and estimation.

➢Methods of costing.
➢Elements of cost estimation.
➢Types of estimates.
➢Estimating procedure.
➢Estimation labor cost, material cost
➢Allocation of over head charges.
➢Calculation of depreciation cost

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What is Cost Estimation?

➢ Cost estimation is the process of determining the
probable cost of the product before the start of its
manufacture.
➢ Cost estimation takes into consideration expenditures
involved form design the product to manufacture the
final product.
➢ Under normal manufacturing organisations, is performed
by an experienced person called by various titles
including estimator, cost engineer, product cost
estimator, purchase cost analyst and manufacturing cost
analyst.
➢ Cost estimating requires high technical knowledge about
manufacturing methods, operation times, etc.
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➢ Cost estimation requires the knowledge of the following

factor:
i. Design time
ii. Amount and cost of material required
iii. Production time required
iv. Labour charge
v. Cost of machinery. overhead and other expenses.
vi. Use of previous estimates of similar parts
vii. Effect of volume of production on costing rate
viii. Effect of changes in facilities on costing rate
ix. Probable future changes in unit price for materials,
labour and expenses when the proposed product is
manufactured at a future date.
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IMPORTANCE OF COST ESTIMATING

➢ Cost estimation is very important for all organization.

before starting actual production or filling up the
tenders.
➢ Because only accurate estimating can enable the
factory owner to make vital decisions such
manufacturing and selling policies.
➢ Both over-estimating and under-estimating are
dangerous for a concern.
✓Over estimation
✓Under estimation
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OBJECTIVE OF COST ESTIMATION

➢ To establish the selling price of a product for a quotation or
contract.
➢ To verify the quotations submitted by vendors.
➢ To know whether the proposed product can be manufactured and
marketed profitably.
➢ To make or bye decisions.
➢ To determine the most economical method process or material for
manufacturing a product
➢ To establish the standard of performance.
➢ To prepare the production budget.
➢ To evaluate alternate designs of products.
➢ To initiate means of cost reduction in existing production facilities
by using new materials, new methods of tooling and processing.
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FUNCTION OF COST ESTIMATION

➢To submit accurate tenders for getting the

contracts.
➢Choose from various methods of production
the one which is likely to be most economical.
➢Fixing the selling price of the product.
➢It gives detailed information of all the
operations and their costs.
➢Management to plan for procurement of raw
materials, tools, etc.

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TYPES OF ESTIMATES

1. Preliminary cost estimate

➢ Based on incomplete data
➢ Based on assumptions and general information supplied by
either the sales or engineering group, especially in areas of
incomplete data.
➢ Suitability: Usually made for new project or product before
designs and plans are complete.
2. Final cost estimate
➢ Based on complete data for a product and hence it is the most
accurate estimate.
➢ A detailed estimate is made usually for every component,
subassembly, and assembly.
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CLASSIFICATION OF COST ESTIMATE BASED

UPON DESIGN LEVEL
1)Conceptual design phase (Accuracy ± 30%)
2)Preliminary design phase (Accuracy ± 20%)
3)Detailed design phase (Accuracy ± 10%)
➢ Conceptual design phase, the geometry and
materials of the parts are not known, but the
functional requirements are known.
➢ Preliminary design phase, all of the materials
and dimensions of the products are known.
➢ Final design phase, complete information of the
products are known with more accuracy.

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METHODS OF ESTIMATING

1) Conference method
2) Comparison method
3) Detailed analysis method

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