TWI Knowledge Summary
Manufacturing - cost estimating
What is cost estimating?
Estimates of the costs associated with manufacturing tasks are made for many reasons. For example to:
- Justify planned capital expenditure
- Determine likely production costs, for new or modified products
- Focus attention on areas of high cost
In principal, estimates are made of the resources required (e.g. materials, labour and equipment), the cost of those resources and the time for which they will be used. From these factors an estimate of the costs of carrying out a manufacturing process is made. Accounting methods (employed by the Company) are usually used, for depreciation and cash flow analysis, when capital expenditure justifications are to be made.
Status
Estimating underpins all manufacturing activities beginning with the first product and initial plant investment plans. It becomes an integral part of the sales and marketing process, particularly when a company must regularly bid for work.
Important issues
Manufacturing cost estimates are based on actual process times to which are added all of the non-value adding activities/allowances (e.g. for load/unload, transport, rest, etc.). An itemised production task list forms a good starting point for developing a cost estimate.
Good data is important if the estimate is to be reliable and all the steps in the manufacturing operation should be considered. Cost estimates should be clearly documented to allow subsequent analysis and determination of causes of variance between actual and estimated costs.
Non-value adding activities/allowances may vary between groups of products. An understanding of such relationships may allow estimating rules based on size, or weight, to be developed.
To improve the estimating process it is necessary to review and compare estimated and actual costs. It is important to understand the reasons for variations and to study trends. It may be that the estimate is correct but some aspect of the manufacturing operation has caused the difference. For example the lack of a skilled operator, which resulted in a need for training, is not a factor that the estimator should normally have to consider. This type of variance should be ignored when making the comparison.
Application
Software (e.g. project management, spreadsheets and specialist products) can be useful tools supporting cost estimate calculations.
Benefits
Good estimating will give a manufacturer a competitive edge because accurate estimates allow informed business decisions to be made. Estimates can highlight high cost areas, which then become the focus for improvement activity.
Risks associated or care needed
Poor estimates influence the business and can result in poor business decisions being made. If an estimated manufacturing cost is excessively high, then business is likely to be lost as the products will be uncompetitively priced. Conversely, if the estimated costs are low then profit will be lost because products are sold at an unattractive margin.
Further information
Additional information about cost estimating can be found in the items detailed below:
Cutting: a guide to best practice. Section 6: Economics of cutting processes
Laser welding of sheet metals - a guide to best practice. Section 6. Economics
You can use the Weldasearch literature database to supplement what you find in JoinIT.
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