Cost Analysis and Estimating

for Engineering and Management

Chapter 3
Material Analysis

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 Overview

 Look at Material in Manufacturing

 Determine the Material Cost
-Finding the Amount of Material Needed
-Obtaining a Cost for Material per Unit
 Consider Joint Material Costs

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 Role of Material
 Engineering is a business of converting material
 Manufacturing Changes Material
- The Change Adds Value
- Results in a Product
- Product May Become Material to the Next Enterprise
 Material Is the Substance Being Altered
 The scope of what constitutes the material
depends on the situation:
- Sheet steel is a product of a rolling mill but is a material
to a sheet metal forming plant

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 Definitions
 Material
- Purchased, Not Manufactured
- Accounts for Up to 50% of Product Cost
 Product
- Completed, Suitable for Delivery
 Customer
- User of the Product
- External or Internal to the Company
 Production changes the procured material into finished
configurations, this means that the procured material
is different from the design condition
 Material is lost to chips, to small unusable pieces, lost
because of processing errors
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 Definitions
 Direct Material
- Becomes Part of the Product
- Included in the Design
 Indirect Material
- Used to Facilitate Manufacturing Process
- Sand for casting model, gasses in welding
 Components
- Used as Purchased in Assembly
 Estimation of materials involved must include
allowances for waste, short ends, and other
losses

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 Manufacturing Processes
 Mixing, Combining, Refining
 Casting and Molding
 Cutting, Shaping, Forming
 Joining and Assembly
 Cleaning, Painting, Finishing, Coating
 Packaging

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 Material Costs
 Two Parts
- Amount of Material (Number of Units)
- Cost of Material (per Unit)
 Amount of Material
- Calculated
- Includes Allowances for Waste, etc.

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 Cost of Material
 Historical Cost
 Contracted Cost (material costs estimate from
previous orders)
 Formal Quotes
 Other with Varying Degrees of Accuracy
-Informal Quotes/Estimates from Suppliers
-Catalogs
-Estimates, “Guess-timates”

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 Other Cost Variations

 Price Changes
 Market Conditions
 Volume Price Breaks
 Discounts

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 Amount of Material
 Bill of Material
- Material Required for the Design
- Specified by the Designer
 Specifications
- Additional Information About the Material
- Defines Detailed Requirements (technical details)
 Need Correct Quantity of Material

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 Bill of Material

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 Amount of Material

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 Material Types
 Direct Material:
- Raw material: Receive direct labour work in conversion
to another design
- Component: not converted, accepted as manufactured
- Subcontract Items
 Parts, components, assemblies, intermediate materials or
equipment produced by vendor/supplier
 Made to Specific Designs
 Not Sold to Others
 Not Catalog Items
- Interdivisional Transfer
 “Sold” to Another Division of the Company
 Indirect material:
- Handled in bulk
- Cost is posted in the Overhead
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 Material Types

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 How Much Material?
 Amount of Material IN the Design
 Amount of Material NEEDED to Make the Design
(always greater or equal to the amount in the
Design)
 Difference = Loss
 Shape
- Amount of Material In the Design
- Implies mass, volume, area, length, count or other
convenient engineering dimension
- Units Compatible with Purchased Material
- Design Should Optimize Material Usage
- Calculate Volume of the Part
- Convert Volume to Appropriate Units
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 Finding Shape Volume
Engineering makes 2 calculations:
- Finding the shape
- Optimising the shape with raw material
A B  Calculate volume of
cylinder part “A”
 Subtract volume of hole in
cylinder “A”
 Calculate volume of plate
“B”
 Find volume of half
cylinder at each end
 Find volume of trapezoidal
portion between
 Subtract volume of two
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holes in plate
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 Material Required to Make
 Depends on:
- Arrangement of Parts to Raw Material
 Orientation
 Matching the grain or pattern
- Process Allowances
 Efficiency of Material Use Is Important and this
depends on the efficiency of the shape

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 Excercise
 Devide a plate 10 x 15 cm into small
size plate 2.1 x 4.8,
 How many parts can be produced?

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 Effects of Part Layout

14 12
Parts Parts

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 Additional Material
 Waste
- Determined by Design & Raw Material
- Difference Between Raw Material Dimensions and Part
Shape
- Example of wastes: chips, sprues, runners, trimmed edges
- The amount can be as large as 15%
 Scrap
- Material Lost Due to Mistakes/Errors (either human or
equipment) but not by design error/fault
- Determined by past experience
 Shrinkage
- Material Lost Due to Physical Deterioration such as aging,
oxidation, chemical reaction, natural spoilage
- Determined by past experience
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 Calculating Material
 Additive Processes (Molding, Casting)
-Sf = Shape for Finished Part
-Ss = Amount of Material to Start
-L1 =Loss due to waste
-L2 = Loss due to scrap
-L3 = Loss due to shrinkage

Eq 3.1

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 Example: Calculating Material
 Additive Processes (Molding, Casting)
A CAD system calculates that the gray iron casting for a
particular design is 350 in3, and the foundry engineer
estimates that the gating system (sprue, runner, and riser)
and pattern draft will require about 75 in3. Scrap
allowance is 15% and shrinkage is for stack loss of iron
due to repeated cupola remelting is estimated to be 5%.
How much material is needed for the casting?

Ss = (350 + 75) x (1 + 0.15 + 0.05) = 425 x 1.2 = 510 in3

If the density of gray iron is 0.26 lb/in3, then the weight is

132.6 lb
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 Calculating Material
 Subtractive Processes (Machining)
 No Simple Equation
 Use the Process

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 Machining Material Process
1. Obtain the finished part shape (Sf) and build quantity.
2. Determine the configuration of the raw material. This
consists of the dimensions of the specified or supplied
material.
3. Determine cutoff and clamping material requirements.
4. Lay out how the parts will be cut out of the supplied
material.
5. Determine the number of parts that can be made from
each unit of supplied material (n1)
6. Divide the total number of parts required by n1 to
obtain the number of units of raw material needed.
7. Compute the total amount of material in units
compatible with the pricing scheme (e.g. pound for
$/lb, etc.)
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 Example of Machining Material Process
Metal desktop panels of 30x60 in are to be sheared
from 0.0625 in thick sheet that are 72x120 in. Scrap
rate is 5% and no shrinkage. What is the material
quantity that should be used to calculate cost?

4 panels can be made from 1 sheet. So for 4 pieces Ss=

72x120x0.0625= 540in3. Material required for each top panel
(including design waste)=540/4=135in3
The purchased amount of material for each top is
135x(1+0.05)= 141.75in3
Waste per panel = Ss – Sf where Sf=30x60x0.0625= 112.5in3.
Waste=(540/4)-112.5= 22.5in3. L1= 22.5/112.5
Efficiency Es=112.5/135= 83.3%
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 Efficiency

 Ratio of Useful Material to Purchased Material

Eq 3.2

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 Figuring Cost
 Sometimes Waste & Scrap (Called Salvage) Can
Be Sold
 Salvage Value
Eq 3.3
 Salvage Reduces Material Cost
Eq 3.4

Vs= salvage value

Cs= price of salvage value
Cdm= cost of direct material
Cms = cost of purchasing material
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 Material Cost Policies
 This is not simple, there are several reasons:
- Specification and magnitude of choices
- Commodity materials
- Special of common designs
- Quotation methods
- Inventory methods
 Material Specification
- Lots of Choices for Material
- Design Must Specify Explicitly
- Exp: if design is only specifies “steel”, then there are many
 Commodities
- Highly Standardized Materials
- Lots of Market Competition
- Commonly Stocked, Catalog Items
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 Contractual Costs
 Quotations
- Terms and Conditions
- Delivery Date
- Fixed Price
- Quotation can be solicited orally or written
 Quote or Price-In-Effect (QPE)
- Collaborative legal agreement between buyer and seller
- Allows Seller to Adjust for Increased Costs
 The value of the contract is adopted as the
material cost

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 Material from Inventory
 Company Maintains Inventory of Materials
-Used By Many Jobs
-Orders Combined
-Material from Different Orders
 Different Order Times
 Different Quantities (Quantity Discounts)
 Material Used Has Varying Cost because
inventories are extensive and constantly changing
 Accounting also establishes rules for the
evaluation of inventories and sometimes is
incompatible with the needs of engineering
 Determining the material cost becomes difficult

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 Inventory
Example
TS = total supply
TU = total usage
JJ = usage for job J

At t=3, TS(3)=2, while

TU(3)=2, and 1 unit
goes to J.
At t=3, inventory is
TS(3) – TU(3) = 3 units

At t=2, 4 units were used,

and 1 unit of the 4 units
came from inventory supp-
lied at t=-2, 3 units were
supplied at t=-1

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 Cost By Time and Quantity
 
Quantity
If 1 or 2 units purchased 2 periods
Period 1-2 3-4 back (t=-2) from current time of
 
Historical costs estimate (E=0), then each unit
cost $ 11.10. If 3 or 4 units were
-2 11.10 8.95 purchased then the unit cost is
$ 8.95. If 2 periods in the future
-1 11.25 9.00 (t=2), 3 units are to be purchased
then each unit will cost $ 10.44.
0 12.00 9.65
 
Forecast costs
1 12.95 10.01
See also table 3.3
2 12.97 10.44

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Original
Cost Policy -
First in First Out
(FIFO)

At E=0, the oldest stock

came from a lot of six
purchased at t=-2 and the
cost is $ 7.80 per unit

$7.80

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Last
Cost Policy –
Last in First Out
(LIFO)

Cost per unit is

$7.90

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Current
Cost Policy

No Current
Receipts
Assume
Qty =8 $7.85

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Lead-Time
Replacement
Cost – Next in
First Out (NIFO)
Material is specifically
ordered for Job J arrives at
time t=2. The lead time is 1,
then the order is placed at t=1
and the unit cost is $12.95
This method, used when
material renewals are
significant, is for bidding
situations where there is
between submission of
estimate and knowing if the
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 Delivery
Cost Policy

The cost is when

the production
is delivered to
customer
No Receipts
Assume
Qty = 8, $10.01

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 Money Out of
Pocket Policy
(MOOP)
Cost Policy

$7.90
At t=2, total usage is 4.
1 is from t=-2 and 3 from
t=-1 and therefore cost
per unit is (3 x $7.90
+ $7.80) = $31.50/4
= $7.88
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 2 x $13.52
2 x $10.32
$47.68 / 4
= $11.92

$12.95

$12.95
+$7.90
$20.85/2
=$10.42
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 MOOP Cost Policy
$11.92
$12.95
$10.42
$7.90
$7.88

(7.88x2)+7.90+10.42+12.95+(11.92x3)=$82.79
$10.35/Unit
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 Comparison of Policies
Policy Unit Cost
Original Cost (FIFO) 7.80
Last Cost (LIFO) 7.90
Current Cost 7.85
Lead Time 12.95
Replacement (NIFO)
Cost at Delivery 10.01
Money Out of Pocket 10.35
(MOOP)

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 Joint Material Costs
 During the manufacture of some products, other
products are produced as well
 Similar to Joint Labor Costs
-Often Includes Some Joint Labor Cost
 Joint materials are those materials that result from
the processing of a singular material
 Start with a Common Material
 At Some Point, Split into Different Products
 Need to Apportion Material Cost to the Various
Products
 Example: processing of raw milk into ice cream
and skim milk
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 Distinction
 Distribution Process
-Material Divided but Not Changed
 Conversion Process
-Material Is Changed During the Separation Process

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 Distinction
 Fig 3.7

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 Dejointing Cost
 Sometimes Multiple Basis for Dejointing
 Marketing Decisions May Influence
-One Product Subsidizes Another
-Premium and/or Discount Pricing
 Accurate Costing Needs to Know Actual Cost
Distribution
 Study example on page 106

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 Product Designations
 Primary Product
-Reason the Process Exists
 Secondary Product
-Would Not Exist If Not for the Primary Product

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 Summary
 Discussed Material Used in Manufacturing
 Learned How to Determine the Amount of Material
Needed
 How to Find a Unit Cost for Material
 Used the Cost and Amount to Get Material Cost

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