Unit - 3

Velammal College of Engineering and Technology
Department of Mechanical Engineering
ME8793
PROCESS PLANNING AND
COST ESTIMATION
PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 1

UNIT - III
INTRODUCTION TO COST ESTIMATION
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
COST ESTIMATION
Cost estimating may be defined as the process of

determining the probable cost of the product before the
start of its manufacture

COST ESTIMATION FACTORS
Cost estimating requires the knowledge of the following factors for calculating the probable cost
of the product:
 Design time,
 Amount and cost of materials required,
 Production time required,
 Labour charges,
 Cost of machinery, overheads and other expenses,
 Use of previous estimates of similar parts,
 Effect of volume of production on costing rates,
 Effect of changes in facilities on costing rates, and
 Probable future changes in unit prices for materials, labour and expenses when the proposed
product is manufactured at a future date.
TYPES OF ESTIMATES
 Preliminary Cost Estimate
Based on incomplete data with or without the product
drawings
 Final Cost Estimate

Based on complete data for a product with most accurate
estimate

METHODS OF ESTIMATING
Three commonly used methods of estimating are

Conference method
Comparison method
Detailed analysis method

DATA REQUIREMENTS FOR COST ESTIMATION

IMPORTANCE OF REALISTIC ESTIMATION
Three possible estimating are:

Over estimation,
Under estimation,
Realistic estimation.

ELEMENTS OF COST ESTIMATION
Total estimated cost of a product consists if the following components.

Design Cost
Drafting Cost
R & D Cost
Materials Cost
Labour Cost
Inspection Cost
Cost of Tools, jigs and fixtures
Overhead cost
1.Design Cost
The cost of design of a product is estimated by following formula
Estimated design cost={Estimated design time} *{salary of designer per unit time}
2.Drafting Cost
After the completion of the design, the drawing have to be prepared by draftsman
Drafting cost={Estimated time to be consumed by draftsman in preparing
drawings} *{salary of draftsman per unit time}

3.R & D Cost (Research and Development )
Considerable time and money has to be spent on research and development work.
The estimated time and the costs to be incurred on it are decided by

judgement or past experience.

4.Materials Cost
The steps involved in the estimation of materials costs are given below:
First prepare the list of all materials required to manufacture the product.
Estimate the weight of all the materials expected to be used in the manufacture
of the product.
Estimated materials cost = {Estimated weight of each part }* {Estimated future price}
Finally, the estimated cost of all the parts .is added to get the total estimated
material cost of the product.

5.Labour Cost
Labour cost ={Estimated labour time needed to produce the product }* {Cost of labour per hour}
6.Inspection Cost
While estimating the inspection cost, one should consider the cost of inspection
equipment's; gauges and consumables, and wages to the inspectors

7.Cost of Tools, jigs and fixtures
It includes the estimated cost and maintenance charges for the tools, jigs, fixtures and
dies required in the production.
Tool cost per unit produced = Estimated cost / Number of job

8.Overhead cost
Overhead expenses are those which cannot be charged directly to a particular product
manufactured.
All expenses other than the direct material cost, direct labour cost, and direct expenses
are known as overhead costs or indirect expenses.
Administrative expenses, selling and distribution expenses are added to the overhead
costs.
COST ESTIMATING PROCEDURE
The step by step procedures in the cost estimation of any product are given below:
Step 1: Study the cost estimation request thoroughly and understand it completely.
Step 2: Analyze the product and decide the requirements and specifications of the
product.
Step 3: Prepare the list of all the parts of the product and their bill of materials.
Step 4: Take make or buy decisions and prepare separate lists of parts to be manufactured
within the plant and parts to be purchased

Step 5: Estimate the. materials cost for the parts to be manufactured in the plant.
Material cost = {Weight of the material}*{Material cost per unit weight}
Step 6: Determine the cost of parts to be purchased from outside.
Step 7: Make a manufacturing process plan for the parts to be manufactured in the plant.
Step 8: Estimate the machining time for each operations listed in the manufacturing process
plan.

Step 9: Determine the Direct labour cost
Direct labour cost = Total operation time * Labour wage rate
Step 10: Determine the prime cost by adding, direct material cost, direct labour cost
and direct expenses.
Prime cost = {Direct material cost} + {Direct labour cost } +{Direct expenses}.
Step 11: Estimate the factory overheads, which include all indirect
expenditure incurred during production such as indirect material cost,
indirect labour cost, depreciation and expenditure on maintenance of the
plant, machinery, power, etc.
Step 12: Estimate the administrative expenses.
Step 13: Estimate the selling and distribution expenses, which include packing and delivery
charges, advertisement charges, etc.
Step 14: Now calculate the total cost of the product.
Total cost of the product ={Prime cost} +{Factory Overheads} +{Administrative Expenses} +
{Selling and Distribution Expenses}
Step 15:Decide the profit and add the profit to the total cost to fix the Selling price of the part.
Selling price= Total cost + Profit
Step 16:Finally estimate the time of delivery in consultation with the production and sales
department.

ESTIMATION FORM

COSTING OR COST ACCOUNTING
 It is the determination of an actual cost of a component after adding different expenses
incurred in various departments.
It is defined as a systematic procedure for recording accurately every item of expenditure
incurred on the manufacture of a product by different sections of any manufacturing
concern.

OBJECTIVES OF COST ACCOUNTING
1. Cost Determination 8. Profit and loss
2. For fixing selling price 9. Fixing the discount
3. Cost Control 10.Pricing policy
4. Comparison with estimate 11.Budget preparation
5. Make or buy decision 12.For preparing quotations
6. Wastage reduction 13.Output targets
7. To suggest changes in design 14.Legal provisions
15.Purchasing new machines

METHODS OF COSTING
 The method of cost accounting adopted differs according to the nature of the
business and types of products manufactured. The commonly used methods of
costing are:
1. Job costing or order costing,
2. Batch costing,
3. Process costing,
4. Departmental costing,
5. Operating cost method,
6. Unit cost method, and
7. Multiple cost method.
METHODS OF COSTING
1.Job Costing (or Order Costing)
This method is concerned with finding the cost of each individual job or contract.
This method is adopted in job order industries such as ship building, machine manufacturing,
fabrication, building contracts, etc.
2.Batch costing
Batch costing is a form of job costing.
In this method, instead of costing each components separately, each batch of components
is taken together and treated as a job.
Batch costing is used to determine the cost of a group of identical or similar products
METHODS OF COSTING
3. Process Costing
This method is employed when a standard product is made which involves a number
of distinct processes performed in a definite sequence.
This method is adopted in industries such as oil refining, chemical, paper making,
paint, cement manufacturing and other similar industries.
For example in the manufacture of cement, the operations of mixing, grinding the raw
material, burning, cooling and grinding the clinker are readily separable and cost of
each of these stages can be accurately calculated

METHODS OF COSTING
4. Departmental Costing
 This method is adopted in determining the cost of the output of each department
separately for the manufacture of the standardized products.
This method is applied in industries like steel industry, automobile industry, etc., where
each department is producing independently one or more components.
5.Operating Cost Method
This method is used in firms providing utility services.
The operating costing is also known as service costing.
Example: In transport services, water works, electricity boards, railways, etc.,
cost is determined on the basis of operating expenses.
METHODS OF COSTING
6. Unit Cost Method
This method is adopted by the firms, which supply a uniform product rather
than a variety of products such as mines, quarries, etc.
7. Multiple Cost Method
This method is used in firms which manufacture variety of standardized products,

having no relation to one another in cost, quality and the type of process, etc.

CLASSIFICATION OF COST
1. Classification of cost according to elements
(i) Materials cost
(ii) Labour cost
(iii)Overheads
2. Classification of cost according to function
(i) Production cost
(ii) Administrative cost
(iii) Selling cost
(iv) Overheads
3. Classification of cost according to variability
(i) Fixed cost
(ii)Variable cost
(iii) Semi-variable cost
CLASSIFICATION OF COST
4. Classification of cost into direct and indirect costs
(i)Direct cost
(ii)Indirect cost
5. Classification of cost according to capital and revenue
(i)Capital cost
(ii)Revenue cost

CLASSIFICATION OF COST ACCORDING TO ELEMENTS
The total cost of manufacturing a product is divided into three basic elements based on nature as:
1. Materials cost,
2. Labour cost and
3. Expenses.
1. Material Cost
Materials cost is the cost of materials required for the manufacturing of the product.
It consists of:
i. Direct materials cost and
ii. Indirect materials cost.

CLASSIFICATION OF COST ACCORDING TO ELEMENTS
2. Labour Cost
Labour cost is the cost spend to the workers who are directly or indirectly involved in
manufacturing organization
It consists of:
i. Direct labour cost and
ii. Indirect labour cost.

3. Expenses:
Expanses has been classified in to two types
iii. Direct Expense and
iv. Indirect Expense.

CLASSIFICATION OF COST ACCORDING TO FUNCTION
1. Production or factory expenses.
2. Administrative or on cost expenses.
3. Selling expenses.
4. Distribution expenses.

CLASSIFICATION OF COST ACCORDING TO VARIABILITY
1. Fixed cost
2. Variable cost
3. Semi variable cost

CLASSIFICATION OF COST ACCORDING TO CAPITAL AND REVENUE
1. CAPITAL COST
2. REVENUE COST
ELEMENTS OF COST

DIRECT MATERIALS COST
Direct materials cost is the cost of direct materials required for the manufacturing of the
product.
Direct material is the one which becomes a part of the product.
It can be measured and charged directly to the cost of the product.
Examples of direct materials are:
Mild steel bar used to manufacture spindles, C.I. used to manufacture pulleys,
wood used for making a table, plastics used to make buckets, etc.

LABOUR COST
Labour cost
It is the cost spent to workers (on the salaries, incentives, bonuses, over time, etc.) who are directly or
indirectly involved in manufacturing organization.
It consists of:
i. Direct labour cost, and
ii. Indirect labour cost
Expenses
All the expenditures other than the direct material cost and direct labour cost are known as
expenses.
Expenses can be classified as:
iii. Direct expenses, and
iv. Indirect expenses (overheads).
COMPONENTS OF COST
1. Prime cost
2. Factory or works cost
3. Manufacturing or production cost
4. Total or ultimate cost, and
5. Selling price

PRIME COST

FACTORY OR WORKS COST

MANUFACTURING OR PRODUCTION COST

TOTAL COST

SELLING PRICE

LADDER OF COST (OR) COST STRUCTURE CHART

DETERMINATION OF MATERIALS COST
For calculating the materials cost of a product, the following step by step procedure can be
used
Step 1-Study the given drawing carefully. Then break up the product into simple geometrical
shapes such cubes, prisms, cylinders etc.
Step 2-Calculate the volume of each part by applying the formulae
Step 3-Add volumes of all the parts to get the total volume of the product
Step 4 -Calculate the weight of material by multiplying the volume by its density

DETERMINATION OF MATERIALS COST
Step 5- Finally calculate the material cost by multiplying the cost per unit weight to the
weight of the material
Material cost=Weight of the material * Cost per unit weight
Where
Weight of the material = Total Volume of the material * Material Density

ESTIMATION OF TIME REQUIRED FOR PARTICULAR JOB
I. Set up time -time required for setting and fixing the jobs and tools on the machine.
II. Operation time
(a) Handling time – time required for loading and unloading operations
(b) Machining time - time taken by the job to perform the operation
III. Tear down time:
Time taken to remove job, tools and other auxiliary equipment

IV. Miscellaneous allowances

a) Personal allowances - are provided to the worker to fulfill his/her personal needs
such as washing hands, getting water, tea, etc .
- 5% for males and 7% for female worker of the total time
b) Fatigue allowances - to recover from physiological and psychological effects of
fatigue
Generally 5% of the total time is considered as fatigue allowance.
Fatigue may be due to excessive work, repeated work, poor lighting, poor ventilation,
machine noises, visual and mental strain, etc.

(c) Contingency allowances- are provided for small unavoidable delays
It is usually less than 5% of the total time
(d) Process allowances - idleness during a process.
They include loss of time due to no work, power failure, faulty material and faulty tools or equipment
(e) Interference allowances- is provided when two or more work elements occur simultaneously.
(f) Special allowances-These include the following:
(i) Start-up allowance, (ii) Shut-down allowance,
(iii) Cleaning allowance, (iv) Tool allowance and
(v) Changeover allowance.

CALCULATION OF STANDARD TIME
• Standard time is the time allowed to an operator to carry out the

specified task under specified conditions and defined level of
performance.
• Standard time is defined as the total time in which a job should be

completed at standard performance.
Standard time = Normal time + Allowances

CALCULATION OF STANDARD TIME
• Normal time, also known as basic time, is the time for carrying out a work at standard rating
Normal (or basic) time = Observed time x Rating factor
• Rating factor, also known as performance rating is a levelling factor to convert observed
timings into normal time
Rating factor = Observed time /Normal time

• Calculate prime cost, factory cost, production cost, total cost and selling price per item
from the data given below in Table for the year 2012-13. Net profit of the items is 10% of
the total cost of the product.
S. No Particulars Expenses (Rs.)
1 Cost of raw material in stock as on 25,000
2 Raw material purchased 40,000
3 Direct labour cost 14,000
4 Direct expenses 1,000
5 Factory/work overheads 9,750
6 Administrative expenditure 6,500
7 Selling and distribution expenses 3,250

METHODS OF ALLOCATION OF OVERHEAD EXPENSES
 There are several methods of allocation of overhead costs. But the choices of particular method depends upon
the nature of work, type of organization and type of machines used.
 The different methods of allocation of overhead expenses are:

1. By Percentage (i.e., allocation by cost proportion)
a) Percentage on prime cost,
b) Percentage on direct labor cost, and
c) Percentage on direct material cost.
2. By hourly rate (i.e., allocation by hourly rate)

a) Man hour rate,
b) Machine hour rate and
c) Combination of man – hour and machine hour rate.
3. By unit rate (i.e., allocation by unit rate)

a) unit rate method

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Velammal College of Engineering and Technology

Department of Mechanical Engineering

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 1

Cost estimating may be defined as the process of

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 3

 Final Cost Estimate

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 5

Three commonly used methods of estimating are

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 6

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 7

Three possible estimating are:

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 8

Total estimated cost of a product consists if the following components.

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 10

3.R & D Cost (Research and Development )

The estimated time and the costs to be incurred on it are decided by

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 11

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 12

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 13

Tool cost per unit produced = Estimated cost / Number of job

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 15

Step 6: Determine the cost of parts to be purchased from outside.

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 16

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 18

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 19

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 20

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 21

Batch costing is a form of job costing.

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 24

7. Multiple Cost Method

This method is used in firms which manufacture variety of standardized products,

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 26

5. Classification of cost according to capital and revenue

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 28

2. Labour cost and

i. Direct materials cost and

ii. Indirect materials cost.

ii. Indirect labour cost.

iv. Indirect Expense.

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 30

1. Production or factory expenses.

2. Administrative or on cost expenses.

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 31

3. Semi variable cost

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 32

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 33

Direct material is the one which becomes a part of the product.

Examples of direct materials are:

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 34

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 36

PPCE UNIT III Dr. T.KAMATCHI, Mr. K. MEENAKSHI SUNDAR 37

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Step 2-Calculate the volume of each part by applying the formulae